Dealing Effectively with the Challenges of Transfer Pricing

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19 Jan 2012
9789264169463 (PDF) ;9789264169074(print)

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This report addresses the practical administration of transfer pricing programmes by tax administrations. Technical analysis of how transfer prices should be computed in accordance with the arm’s length principle is outside the scope of this report. Instead the report focuses on the practical experiences of a number of FTA member countries and some non-member countries. The report discusses ways in which the management of transfer pricing programmes can be optimised, so that transfer pricing audits and enquiries are conducted efficiently and in a timely manner, for the benefit of MNEs and tax administrations alike. It is concerned with the practical steps tax administrations need to take to correctly identify transfer pricing cases that merit audit or enquiry and then to progress those cases to as early a conclusion as possible. 
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  • Foreword
    This report is the result of work that was commissioned by the Forum on Tax Administration (FTA) and undertaken by a study group led by the United Kingdom. Since its creation in 2002, the FTA has grown to become a unique forum on tax administration for the heads of revenue bodies and their teams from 43 OECD and non-OECD countries.
  • Abbreviations
  • Executive Summary
    The increasingly integrated nature of the global economy and the ongoing importance of Multinational Enterprises (MNEs) in that economy mean that questions of transfer pricing are some of the most significant tax issues that MNEs and tax administrations have to manage. These issues are significant not just because large amounts of tax can be involved but also because they can be complex and their resolution is dependent on a good understanding of the facts and specific commercial context of the case. Consequently, the resolution of transfer pricing disputes tends to be resource intensive for both MNEs and tax administrations.
  • Preface
    Foreword by the Permanent Secretary for Tax of HM Revenue and Customs in the United Kingdom
    Business, tax advisers and tax administrations alike see transfer pricing as one of their biggest risks. Business fears double taxation when adjustments to taxable profits have to be made following a transfer pricing enquiry, tax administrations are concerned that multi-national enterprises can choose how they allocate their global profits by the way they organise their affairs and as a result they can allocate profits to low tax jurisdictions without moving the underlying economic activity.
  • Introduction
    This chapter discusses the importance of transfer pricing issues and the reasons why they have tended to increase in terms of both complexity and importance. It sets out some of the administrative challenges tax administrations have to face when managing transfer pricing programmes and the purpose of the study that resulted in the report. It describes the work programme and the results of the initial survey of participating tax administrations.
  • Selecting the right cases
    This chapter examines the process of risk identification and how tax administrations go about selecting the right cases for transfer pricing audit or enquiry. It examines the information sources on which risks assessments are based and the different ways in which tax administrations approach the information gathering process. It includes a summary of the features that may suggest that a transfer pricing risk is present in a case. It considers the role of commercial understanding in the process of risk identification.
  • Getting off to a good start
    This chapter is concerned with the initial stages of a transfer pricing audit or enquiry. It looks at the fact finding process and the part that early dialogue between the tax administration and the taxpayer can play and how best to frame requests for relevant business records.
  • Governance arrangements
    This chapter looks at the governance arrangements that tax administrations put in place to ensure effective oversight of their transfer pricing programmes. It includes some practical examples and a discussion of the project management of transfer pricing audits and enquiries.
  • Maintaining progress, tackling delay
    This chapter analyses the principal causes of delay in transfer pricing audits and enquiries and how they can be overcome. It discusses the process of document examination and how large volumes of material can best be managed. The chapter includes a discussion of the importance of good communication between tax administrations and taxpayers and the role of advisors. It also considers what use can be made of alternative dispute resolution techniques.
  • Reaching a decision point
    This chapter considers the closing stages of an audit or enquiry and the process of deciding the final outcome. In particular it looks at the way in which decisions to settle or litigate are reached, the process of negotiation, the role of an internal appeals function and litigation.
  • Resources, skills and use of specialists
    Transfer pricing work is a specialism in its own right and complex cases will often require input from experts in other specialist fields as well. This chapter discusses how tax administrations can best manage and develop the skills and knowledge needed to run effective transfer pricing programmes. It also looks at ways in which the work can be organised.
  • Transfer pricing and developing countries
    chapter is concerned with the challenges developing countries face in the field of transfer pricing. It considers some of the ways in which those challenges can be overcome and the part international co-operation has to play. It also looks at ways in which access to information and comparables could be improved in developing countries.
  • Annex A: Denmark
  • Annex B: South Africa
  • Annex C: France

    International issues and transfer pricing in particular are a major audit target for the French tax administration (la Direction general des Finances publiques).

    la Direction general des Finances publiques recognises that, due to the complexity of transfer pricing issues, transfer pricing audits require highly technical skills and special measures (training, documentation, private databases access).

    For reasons of efficiency and legal certainty, in 2008, the Central Office decided that transfer pricing audits would be performed by national and inter-regional tax audit directorates. The large companies tax audit directorate (Direction des Vérifications Nationales et Internationales - DVNI) deals with the majority of transfer pricing cases as it is in charge of the audit of main groups and big companies.

  • Annex D: Transfer pricing risk identification and assessment
  • Annex E: Cloud computing
    The term "cloud" has been around for a while as a simple metaphor to represent a complex information technology infrastructure. Originally used to represent the telephone network, the cloud symbol is now commonly used to represent the Internet. "Cloud computing" is a generic term for the delivery of information technology services over the Internet. Probably the most basic form of cloud computing service is the provision of data storage. The user files information over the Internet and it is stored by the third party service provider. The user no longer has to worry about backing up their data as that is part of the service and the data are generally accessible to the user wherever they are able to access the Internet. On the other hand the user generally has no interest in, and frequently no control over, where the service provider chooses to locate the servers on which their data are stored. That does not mean that this cannot be specified in any agreement with a service provider if a particular user is concerned about the location of their data.
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