Transfer pricing getting more scrutiny: a survey by Ernst & Young finds that government authorities are putting more attention and more resources to examining--and even auditing--transfer-pricing transactions.

• Author: Turner, Bob
• Position: International Taxation

As multinational companies globalize their operations and international trade continues to increase in importance, tax issues associated with varying jurisdictions take on new importance--increasing government attention and focus on transfer pricing. Transfer-pricing audits are becoming more and more common, and multinational companies are being forced to pay closer attention to their transfer-pricing policies and procedures, according to the Ernst & Young Transfer Pricing 2003 Global Survey.

The results of the most recent E & Y survey show that transfer pricing is the most important international tax issue multinational companies (MNCs) now face. This high level of company concern is driven by the fact that 86 percent of MNC parent company respondents and 93 percent of subsidiary respondents indicated that audits by tax authorities are becoming a rule rather than an exception. This audit increase is, in turn, driving a new focus on compliance. Of parent company respondents that have experienced an audit, half have reviewed their transfer-pricing documentation practices as a result. These findings summarize a spectrum of transfer-pricing management issues from planning to documentation and controversy.

[ILLUSTRATION OMITTED]

Staying Current By Planning

It is increasingly important for MNCs to design their transfer pricing by taking into account both tax and commercial considerations. This view of planning is not the nefarious view that governments have, which holds that companies artificially manipulate intercompany pricing to achieve undue tax advantages. Rather, this is the view of planning in which operational and regulatory changes are taken into account in keeping transfer-pricing policies current.

Globalization implies supply chain changes. As companies increase their volume of related-party transactions, change the types of these transactions or switch their, the policies and pricing of the transactions should change, too. Unfortunately, only a minority of survey respondents seems to recognize the connection: 32 percent of parent respondents said that business unit leaders were involved in transfer-pricing design.

Survey responses show transfer-pricing responsibility rests with either the CFO or the tax department. These results suggest a less balanced allocation or sharing of responsibilities than one might expect, given the importance of business strategy in the design of transfer-pricing policies as well as the "business approach" taken by many transactions-based tax regimes.

At the same time, proactively taking into account aggressive new legislative, regulatory and enforcement efforts aimed specifically at transfer pricing is another aspect of planning. Seventy-two percent of parent company respondents and 75...