Key trends in transfer pricing 

I'm Sean Foley, the head of KPMG's Global Transfer Pricing Services. I lead a network of professionals who provide advice to multinational corporations on transfer pricing which is both an area of substantial risk and also an area of substantial opportunity.

Risks and Opportunities

Transfer pricing as an opportunity is one of the key ways that multinational companies today can manage their effective tax rate by marrying the substance of their business with effective tax planning. On the risk, transfer pricing is the single largest area of assessment that most governments around the world including the United States, Australia, Japan and now emerging markets like China are making when they look at multinational corporations on the tax audit.

The thing about transfer pricing is that there's a global standard. The OECD has established this, and all countries around the world except for Brazil have agreed to a global standard. On the other hand transfer pricing is also an area of important subjectivity and so transfer pricing is where people of good will can disagree and people without good will can strongly disagree.

Trends

But what we're seeing is very large assessments and large assessments that are sometimes in the order of a billion dollars or more and what is particularly dangerous in the area of transfer pricing is that a large assessment is often an assessment that involves double tax. And what is double tax? Double tax is when the same income is taxed in two countries. So not only do you have a large assessment with penalties, but you may also be paying that tax payment twice. For example, something that's happened this past week, there was an announcement in the tax press that an important Japanese-based company had just had a double tax assessment that had resulted in a 1.1 billion dollars of double tax. That's a very large hit to an effective tax rate and something that corporations trying to manage their effective tax rate and their tax provision are having a very difficult time managing.

Asia Pacific

I think what companies that are operating in the Asian Pacific Region particularly face as a challenge is the diversity of the approach that they're going to see across the table when the tax authority comes in the door to talk to them about their transfer pricing. Part of this is going to be the various levels of sophistication because some of the jurisdictions had been involved, like for example, Japan and Australia for many years with transfer pricing. Others such as Malaysia and Vietnam are relatively new and so having that very divergent level of experience is actually a bit of a challenge because what companies prefer is to have a uniform transfer pricing policy that they can explain to all governments. But if we have various levels of sophistication, sometimes that uniformity in and of itself can be a bit of a challenge because the governments are just not reflecting the same level of understanding and the same level of sophistication.

The future

Well companies have been I think very used to doing documentation and I think that documentation is pretty standard across both the corporate world and what is expected by the governments, but I think what we're thinking in the future is that the level of documentation, the sophistication of documentation is going to be growing. I think what companies are particularly realizing now that transfer pricing, as I mentioned at the outset, is not only about compliance and about documentation. It's also about opportunity and trying to establish within for example your supply chains and as you become more sophisticated and global in your supply chain there are opportunities to marry effective supply chain management with effective tax planning and that is where transfer pricing really comes into play going forward. And I think what we're going to see in the future is more companies taking advantage of that particular opportunity to marry transfer pricing and supply chain management.