Intercompany pricing under intense scrutiny as many governments worldwide search for new sources of tax, KPMG survey

Businesses operating in countries such as China, Greece and Vietnam now have to contend with new or greatly expanded transfer pricing regimes, while virtually all the larger economies which already have transfer pricing regulations in place, are intensifying their audit programs and tightening their rules.

Transfer pricing reviews typically focus on comparing transactions between companies in the same organization, with similar transactions between unrelated companies - so called 'arm's-length' transactions. Some authorities may levy taxes and impose penalties on companies where their internal pricing is found to deviate from arm's length pricing.

Transfer pricing audits are becoming increasingly common, as many governments develop greater experience in analyzing transfer prices and seek to protect their respective tax bases.

The KPMG survey looks in detail at transfer pricing regulations in 60 countries. In Canada, the tax authorities seem to be moving away from a strict rules-based interpretation of tax liabilities, and towards a 'taxation by negotiation' approach.

While this might offer opportunities to reduce tax bills, 'taxation by negotiation' has a disadvantage that it can increase uncertainty for large corporate taxpayers, many of whom value a predictable outcome to their transactions.

By contrast, the US tax authorities have broadened the issues that can be covered by advance pricing agreements (APAs). These are agreements made in advance between taxpayers and revenue authorities on the prices, and therefore the tax, that will be attached to a particular type of transaction.

APAs are popular among companies wanting predictability, and the US APA program is attracting increasing numbers of applications. Elsewhere in the Americas, APAs are available in Colombia, Mexico, Peru and Venezuela and have become an attractive alternative for companies as the number of transfer pricing audits and tax assessments have risen.

In Europe, the survey records a steady stream of new regulations from many of the large economies, governing documentation requirements, the application of transaction based methodologies and valuations of intellectual property and business opportunities.

It also points to increased interest among the Eastern European states in introducing transfer pricing regulations, following a flood of new investments from companies wanting to take advantage of lower costs and favorable tax regimes.

But it is in the Asia Pacific region where the authorities seem to be the most active on transfer pricing. India, Australia, China, the Republic of Korea and Japan have all recently seen an increase in audit activity, and China and Singapore's tax authorities have recently signaled that they intend to step up their transfer pricing compliance and field audit work.

The result is that Asia Pacific tax authorities are seen by many respondents as the toughest in the world in this field.

"With the profits of many multinational enterprises shrinking, tax authorities can be expected to ratchet up their audit activities to ensure that each of their jurisdictions gets its fair share of a shrinking pool of tax revenues. This has the potential to require international companies to defend their transfer prices wherever they operate,"

said Muhammad Saloojee, KPMG's Head of Tax in Saudi Arabia

Saloojee adds, "In the parts of the world where bilateral tax treaties that can provide a mechanism to resolve these disputes do not exist, these cases can be very hard to defend. A strong, defensible, transfer pricing policy and proper implementation becomes more important for large international companies with every year that goes by."

Saloojee concluded by saying that, "Whilst Saudi Arabia does not have complex transfer pricing rules like other jurisdictions, transactions between related parties must be concluded on the basis that the parties are independent. As a result we are seeing the Saudi Tax Authorities scrutinising transactions between related parties which in most cases involve foreign parties and challenging such transaction where arm's-length principles are not satisfied. Such focus is expected to continue as Saudi Arabia attracts more foreign investors."