Transfer pricing, which always ranks among the most pressing concerns for multinationals' tax departments, has become even more critical this year. As cash-famished tax authorities worldwide step up their enforcement efforts, many businesses are reviewing their intercompany pricing policies to make sure they're up to snuff.
While they're at it, companies should take a good look at new OECD proposals for revisions to its basic transfer pricing guidelines, which may start to impact U.S.-based multinationals as early as next year.
I asked Adam Katz, partner in PricewaterhouseCoopers' transfer pricing practice and one of the firm's liaisons to the OECD, how the proposed changes would affect corporate tax departments. He sees two important themes.
First, the revised guidelines “provide a lot more detail, particularly behind the economic analysis and functional analysis that would be required to comply with the arm's-length standard,” he notes. To that extent, they're similar to the detailed U.S. regulations under Section 482. But that won't necessarily help U.S. companies with the compliance task. “I think what you have, overall, is an increase in the compliance burden,” says Katz. “Multinationals are trying to set their policies under the arm's-length principle, as likely to be applied in each of the countries in which they do business. This is going to require a more robust comparability analysis and economic analysis to be able to get to that point and to have a well-documented and defensible position that the member-country tax authorities will, obviously, be scrutinizing them under.”
Second, the proposals would eliminate the hierarchy of pricing methods, which gives preference to traditional transaction methods based on comparable uncontrolled prices — basically, what one party would charge another independent party. By removing that preference, the new guidelines “strongly hint at greater use of profit-based methods,” says Katz. “There seems to be a shift toward looking at the overall profitability of the taxpayer, including the two related parties, more than in the previous set of guidelines.”
Take the case of a foreign subsidiary treated as a simple service provider or distributor. “Because of the way the new guidelines are written, the analysis that would be needed to defend a relatively constant rate of return by a service provider or distributor is now going to be greater,” says Katz. “And it's going to push the ability of some of the foreign tax authorities to argue for more income, possibly by virtue of examining the profits of the enterprise beyond those of the local subsidiary.”
The wheels of the OECD grind slowly, and the proposals will likely undergo a couple of rounds of consultations and redrafts. But Katz believes the organization would like to see the revised guidelines take effect by the end of 2010. ###