Implementing transfer pricing policies is challenging for businesses irrespective of their size.
According to a Deloitte survey, approximately 70% of business leaders in more than 250 multinationals believed there is scope for improving their group’s operational transfer pricing processes. Given the vast amount of information required for TP and different teams across tax and finance departments make these challenges real and can have a significant impact on the organization.
Inaccurate or inefficient TP policies may result in cash outflows due to year-end adjustments, tax fines, or penalties. Additionally, using limited resources on repetitive and manual tasks impacts the organizational efficiency and profitability.
Here are Five Transfer Pricing Mistakes made by Multinationals
Global companies operate across various geographies and need to adhere to different and unique TP regulations. They may need to divert from the standard Organization for Economic Co-operation and Development (OECD) guidelines. Over 70% multinational companies struggle to stay updated on TP regulatory changes.
Adapting to the dynamic regulatory environment, MNCs must reconcile strategic initiatives with local requirements. Being vigilant and staying abreast of these changes is important to avoid future problems. Often, companies rely on their in-house teams to stay updated and this may result in missing out on important regulatory changes in one or more countries. Such oversight may cause huge penalties or other severe implications.
Maintaining proper documentation is the foundation of staying compliant with TP regulations. However, over 60% of the audits show errors or inconsistency in documentation resulting in expensive penalties. This administrative burden to maintain accurate and comprehensive documentation can be overwhelming when MNCs operate across different jurisdictions. Several companies fail to implement proper systems to streamline processes and mitigate the risks.
According to the OECD Transfer Pricing Report, disputes have increased by almost 40% in the last few years. Incorrect transfer pricing methods to report areas like intangible asset transfers, management fees, and intercompany services result in higher adjustments and audits. Companies overlook to proactively prepare for audits through accurate benchmarking, clear intercompany transaction policies, and strong documentation, which result in expensive outcomes.
Increasing digitalization impacts TP and presents allocation and valuation challenges. Several frameworks address these issues by redefining how digitally generated profits are taxed. However, adapting to these is complicated, especially for MNCs operating across different geographies. Global companies fail to implement accurate methods for valuing intangibles and the effective allocation of revenues.
More than 50% of disputes arise due to disagreements over valuing intangible assets. Documenting, defining, and valuing intangibles like IP and trademarks need meticulous analysis. The lack of uniform valuation methods across different geographies complicates compliance, which is another error made by MNCs.
More than one transfer pricing example shows it remains a complicated and dynamic challenge for global companies. Organizations face several hurdles and need strategic foresight and strong systems. With the right global partner, MNCs can proactively address these challenges and optimize global operations.
Ready to rethink your TP strategy? Drop a mail to info@greenvissage.com or call on +91 8237857853.
