Accelerated upheaval across the international tax landscape spurred by tax reforms across the world as well as initiatives such as the OECD’s digitalisation effort have led to unprecedented uncertainty felt by global tax executives, said EY which recently released results of EY Transfer Pricing and International Tax Survey 2019.
The survey—covering transfer pricing, controversy, and global tax reform—collected responses from more than 700 senior tax and transfer pricing executives representing the Americas, Europe and Asia-Pacific, according to EY.
As the findings reveal, almost eight out of ten executives (79%) describe today’s international tax environment as “uncertain,” with 42% saying “very much so” or “extremely so.”, the company said.
The tax world is moving to an era of multilateral policy and administration, which is causing monumental shifts in the practice of transfer pricing, said Peter Griffin, EY global transfer pricing leader.
“Executives believe there will be an upswell in the depth, breadth and frequency of challenges to transfer pricing,” Griffin noted. “Specifically, executives surveyed anticipate significantly more instances of audits, fines and assessments, and they recognize the need to respond.”
Transfer pricing: the focus is risk
Survey results also indicate that 64%of respondents cite risk avoidance and mitigation as the primary drivers of their transfer pricing priorities. According to respondents, the top three factors contributing to concerns around tax risk include:
- increased information sharing among tax authorities,
- information being made public, or reputational risk, and
- a relative lack of centralised and consistent control in responding to tax authorities.
Transfer pricing will remain a top focus during audits of multinational companies as a general dissatisfaction with the administrability of the arm’s length standard continues among tax authorities, said Jeff Michalak, EY global international tax and transaction services leader .
“This is evident in the latest OECD project on addressing the tax challenges of the digitalisation of the economy, known as BEPS 2.0, which implies that the digitalisation of the economy may require a significant rethinking of transfer pricing principles in certain circumstances. Fortunately, the OECD has been open to and engaged in dialogue with the taxpayer and advisor community to ensure administrability and increase certainty to the controversy burden on both taxpayers and tax authorities around the world,” he pointed out
Other survey highlights
- 82% of respondents have experienced challenges to their transfer pricing over the past three years, with 40% of these saying that the resulting adjustments have led to double taxation.
- The most critical areas of tax controversy according to respondents continue to be: transfer pricing of goods (64%), intragroup financial services (41%) and value added tax (VAT) or goods and services (GST) tax (34%).
- Respondents expect that the above critical areas would not likely change but cite two notable exceptions where they expect a significant increase in scrutiny: challenges to intellectual property (49%) and private equity (PE) controversy (39%).
- 59% say that the greatest impact of global tax reform will be felt in fundamental transfer pricing rules.
- The second and third key areas of impact are permanent establishment (13%) and thin capitalisation rules (11%).
- When asked to rank the area of operations or tax strategy that is most impacted by global tax reform, the most frequently cited business component is the supply chain (41%), followed by treasury operations (29%) and intellectual property (IP) strategy (also 29%).