International tax reforms and supply chain transformations accelerated by the pandemic contribute to an unprecedented level of uncertainty and risk for businesses’ transfer pricing functions, said EY recently when releasing results of the 2021 EY International Tax and Transfer Pricing survey.
The biennial survey canvassed the views of 979 transfer pricing professionals in 53 jurisdictions across 25 industries, according to EY, adding that 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 licenses.
- 76% of respondents say they are challenged by the volume and complexity of global tax reforms.
- 71% of respondents say that these reforms will lead to increased transfer pricing-related costs for their organisations — 30% predict that costs will rise by at least 10% over the coming three-year period.
- 58% of transfer pricing leaders say they are not involved as much as they need to be in key business decisions as the world starts to emerge from the pandemic. Of this total, 24% say they are involved in some, but not all, decisions; and 30% report that they are only involved on a reactive basis.
- New or evolving legislation is seen by 58% as one of the top three factors in transfer pricing risks, with 25% mentioning it as the biggest contributor.
- Fundamental changes in the dynamics of businesses around the world, in particular the restructuring of supply chains and changing working patterns, will have a real impact on transfer pricing work.
- 61% of respondents say they will likely be taking steps to modify their organisation’s approach to transfer pricing as well as their operations, compliance and documentation within the next two years.
Work from anywhere: a driver of changes
Respondents cite a number of different drivers for these changes, ranging from changes to their business model (52%), supply chain (43%), work from anywhere practices (46%) or environmental, social and governance (ESG) pressures (36%).
As organisations increasingly work from anywhere the survey shows that many respondents anticipate impacts resulting from workers being stranded outside the jurisdiction in which they are employed.
Survey results indicate that 47% of respondents face these challenges now and 49% expect to do so over the next two years.
In addition, 75% say they will struggle to find workers with the necessary transfer pricing talent, EY noted.
More rigorous audits
There is also a view shared among survey respondents that more frequent and rigorous audits will become the norm.
Survey results indicate that 65% of respondents predict a rising number of transfer pricing audits overall.
In addition, 53% anticipate greater scrutiny of transfer pricing documentation while 48% anticipate more rigorous audits in general, often investigating multilateral issues or entire value chains.
The issues that respondents believe are most likely to come under scrutiny include intellectual property-related matters such as location and ownership of assets and control of risk (cited by 38% of respondents), permanent establishment (37%) and headquarter and management services transactions (36%), EY said.
“The pandemic has led to profound disruptions to business models, in particular in supply chains, but also to ways of working and ESG,” said Jeff Michalak, EY Global International Tax and Transaction Services Leader. “These trends are having an immediate and material impact when it comes to taxes, specifically creating transfer pricing challenges.”
To manage these impacts, transfer pricing executives must secure greater alignment with their businesses, streamline transfer pricing functions and embrace digital models, he advised.