"Don’t fall into the trap of thinking Transfer Pricing is something just multinationals or listed businesses should worry about"
Kirsty Rockall, International Tax and Transfer Pricing Partner, KPMG
Why it matters
The launch of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) shows that tax authorities have become more committed to rooting out perceived tax avoidance and maximising revenues. They’re investing in data scientists and other resources, while subjecting taxpayers to a new level of scrutiny.
More than 100 countries are collaborating on BEPS and each has its own vested interest. Governments across the globe are competing with one another to secure direct and indirect tax revenues from international businesses.
And this is not just an issue for blue chip corporates. “Don’t fall into the trap of thinking it’s something just multinationals or listed businesses should worry about. It could affect your tax bill too,” warns Kirsty. That’s why it’s vital to get a firm handle on how you operate and what that means in relation to transfer pricing (TP).
What is Transfer Pricing?
At its simplest, TP is about making sure that the right profits or losses are allocated and recognised in the appropriate jurisdiction – and taxed accordingly. “It’s important to get on top of it when expanding overseas, as it relates to critical issues such as commercial effectiveness, corporate structure and tax strategy,” comments Kirsty. “And to ignore TP obligations means potentially falling foul of the authorities.”
The way your enterprise operates and the intellectual property (IP) you own has a direct bearing on how you should approach TP. “Your IP might, for instance, be a brand or an innovative piece of technology,” says Kirsty. “Let’s say you legally own it in a relatively low tax jurisdiction. But if all the decision-making about that IP, such as how it is developed and marketed, is made in another higher tax jurisdiction, the argument runs that profits generated by that IP should be recognised in the country where the decisions are made, instead of where legal ownership lies.” Tax authorities are, as never before, focusing on employees’ location and where the decision-making takes place.