Fear of double taxation emerges among businesses amid global tax reform, said EY recently.
Global tax reform, ineffective use of technology and economic uncertainty are putting significant strain on business’ transfer pricing (TP) capabilities, according to the 2024 EY International Tax and Transfer Pricing Survey.
Transfer pricing is a critical tax function for organisations around the world, that oversees internal corporate transactions including cross-border payments between subsidiaries, property leases and intellectual property (IP) licenses, according to EY.
The global survey of 1,000 transfer pricing professionals and stakeholders, in 47 jurisdictions, finds that 84% of respondents face a “moderate” or “significant” risk of double taxation as a result of global tax reform, EY said.
In addition, 71% say that global minimum taxes will have a “moderate” or “significant” impact on their transfer pricing policies, the firm noted, adding that demand for advanced certainty on TP positions doubles.
“With the heightened risk of double taxation, getting certainty is at a premium,” said Tracee Fultz, EY Global Transfer Pricing Leader. “This requires a fundamental pivot from tax planning to building as much certainty as possible into transfer pricing positions, which means being as proactive as possible in dealing with anticipated and current controversies.”
External factors impacting TP strategies
The cascade of outside pressures impacting broader business decisions are complicating TP leaders’ roles, EY pointed.
Survey highlights on TP
Of those surveyed, 77% say inflation will have a “moderate” or “significant” impact on their transfer pricing policy over the next three years, while 51% say higher interest rates have impacted their medium and long-term intercompany debt pricing.
- Of those surveyed, 77% say inflation will have a “moderate” or “significant” impact on their transfer pricing policy over the next three years, while 51% say higher interest rates have impacted their medium and long-term intercompany debt pricing.
- Changes in supply chains and commitments to environmental, social and governance (ESG) objectives add further challenges.
- 28% have already changed their transfer pricing policy to account for ESG policy, while 42% say their organizations have relocated production from one jurisdiction to another in the last three years because of geopolitical issues.
- More than six in ten (62%) anticipate changes to supply chains having a “moderate” or “significant” impact on their TP policy in the coming three years as well.
Embracing emerging technologies to drive strategic value
According to survey results, 75%of respondents say that ineffective use of technology was their first or second biggest challenge, while 67% ranked “poor data quality” as their first or second biggest challenge.
In addition, 73% say that investing in more sophisticated operational transfer pricing technology would result in “moderate” or “significant” improvement in risk management, and 88% cite they expect TP technology to save their organization money over the next three years.
Heightened risks spur drive for transfer pricing certainty
The survey also shows a dramatic increase in companies turning to advance pricing agreements (APAs), which allow businesses to negotiate the terms of their intercompany transactions with tax administrators for multiple years before filing tax returns, to create greater certainty around their TP positions and more value in a Base Erosion and Profit Shifting (BEPS) 2.0 world.
Survey highlights on APAs
- 61% and 59% say bilateral and multilateral APAs, respectively, will be “very useful,” up from 34% and 30%, respectively, in 2021.
- 59% of respondents say unilateral APAs will be “very useful” to managing TP-related controversy over the next three years, more than double the 29% of respondents in 2021.
“It’s time that transfer pricing functions break with their traditional linear path in which they first plan, implement and, ultimately, defend positions,” said Fultz. “They should focus instead on the best strategy to achieve certainty. This includes having dispute resolution plans supported by automation and standard data.”
