The new global standard: local comparables for business abroad.

• Author: Tully, Brian
• Position: QUICK STUDY

All of us in finance have seen the global economy take a number of turns over the past several months, and tax has been no different. Last year, transfer pricing became a hot topic that moved out of the tax department and into the spotlight. It's become obvious that the way tax is handled throughout a multinational business is more than just a number it has the potential to affect an organizations' reputation and bottom line.

Around the globe, tax authorities have become more aggressive, primarily to reduce fiscal deficits. The transfer pricing practices of a number of companies have been challenged as tax authorities look to corporate taxes to help buoy revenue above the red line. As these countries become more sophisticated, so do their tax departments.

In the most widely known cases, the argument was layered with issues of ethics, responsibility and interpretation of laws that hadn't caught up with the realities of business today. Now the conversation has taken a dive into each of these layers, with authorities taking a granular look at not only the tax policy of a business, but how that policy plays out in every transaction and line item.

A look at the graphic below demonstrates this trend. According to the International Bureau of Fiscal Documentation (IBFD) and World Bank, the number of countries that introduced specific transfer pricing regulations for direct taxation purposes skyrocketed between 2007 and 2011. These countries are focusing resources on building capacity within their tax administrations to handle the influx of audits and paperwork. At the same time, tax authorities in a number of emerging markets are taking on transfer pricing for the first time. In these markets, including the BRICs (Brazil, Rusia, India and China, as well as South Africa and Italy) and others, tightening up these processes alone can mean millions of $s in otherwise lost tax income.

The United Nations, Organisation for Economic Co-operation and Development (OECD) and World Bank have all been vocal on the need for tax transparency and standardization. In the midst of...