20 Aug The Importance of Localization to Your Bottom Line
August 20, 2018
The Importance of Localization to Your Bottom Line
~3-minute read. This article identifies the current trend among tax authorities for requiring hyper-localized documentation.
In 2017, it is estimated that tax authorities worldwide raised over $50,000,000,000 in transfer pricing adjustments. Unfortunately, this is just the beginning. Many countries have come to the realization that since transfer pricing enforcement can target foreign subsidiaries who don’t vote, it is effectively a cash cow that can help governments close their budget deficits. As such, governments have doubled down and provided almost unlimited resources to their tax authorities so that they can audit more companies for transfer pricing. In just a couple of years, fifty billion is going to seem like a drop in the proverbial bucket.
A recent survey of tax directors found that 84% of MNCs expect to be audited for transfer pricing in at least one jurisdiction within the next two years. Based on trends that CrossBorder Solutions is seeing with its client base, we believe that this is extremely optimistic. With the dramatic rise in audit resources, we would predict that most, if not all, MNCs will face audits in multiple jurisdictions in the coming years. In either case, taxpayers must begin to prepare for this new reality.
In the past, most MNCs have prepared studies that were designed to protect against penalties. To this end, generic OECD studies usually sufficed as they demonstrated a good faith effort to comply with the regulations. However, the generic approach is no longer acceptable. Chapter V of the OECD Guidelines are not regulations, do not carry the force of law, and certainly are not enforceable in any jurisdiction. They are simply recommendations that provide non-binding principles and standards that multinational corporations can or cannot follow. As such, from a legal stand-point, merely citing these guidelines is not sufficient. Therefore, generic studies do not protect companies against audit and adjustments. In fact, they may actually encourage a tax examiner to take a harder look at the report(s).
Today, most countries have adopted their own transfer pricing regulations that provide detailed guidance as to how the economic analysis should be undertaken and how the documentation should be prepared. One of the best ways to protect against audit and adjustments is to prepare reports that have been customized for the local jurisdiction. While this will marginally increase the costs of compliance, the expense will be much less than the costs associated with an audit/adjustment process.
For more details on how companies can hyper-localize their transfer pricing studies so that they maintain compliance with the requirements of the local tax jurisdictions, fill out the form below to download our whitepaper on localization.
In 2017, CrossBorder Solutions interviewed 1,250 multinational corporations. Our survey focused on three primary areas. First, we examined the overall importance of transfer pricing. Second, we looked at the audit and adjustment experience that MNCs have had with tax authorities throughout the world. Finally, we scrutinized how the set of companies have dealt with the documentation requirements on a global basis.
Below are some of the more interesting findings from the survey.
- 78% percent of respondents rated transfer pricing adjustments as the number one tax issue.
- 75% of respondents indicated that transfer pricing was a core focus of a past audit.
- 82% of respondents expect an examination by a tax authority into their transfer pricing in the next two years.
- 58% of respondents that were audited for transfer pricing, had the audit result in an adjustment.
- 59% of respondents that claimed that they were audited for transfer pricing had not completed their documentation on a contemporaneous basis.
For more details on how MNCs are coping with the new transfer pricing compliance environment, fill out the form below to download our 2016-2017 Transfer Pricing Audits and Adjustments Survey.
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