Accelerated upheaval across the international tax landscape spurred by tax reforms across the world as well as initiatives such as the OECD’s digitalization effort have led to unprecedented uncertainty among global tax executives. This is according to the EY Transfer Pricing and International Tax Survey 2019, which surveyed more than 700 senior tax and transfer pricing executives representing the Americas, Europe and Asia-Pacific.
The survey covers a wide range of trends and issues along three principal areas: transfer pricing, controversy and global tax reform. As the findings reveal, almost eight out of ten executives (79%) describe today’s international tax environment as “uncertain,” with 42% saying “very much so” or “extremely so.”
Peter Griffin, EY Global Transfer Pricing Leader, says: “The tax world is moving to an era of multilateral policy and administration, which is causing monumental shifts in the practice of transfer pricing. Executives believe there will be an upswell in the depth, breadth and frequency of challenges to transfer pricing. Specifically, executives surveyed anticipate significantly more instances of audits, fines and assessments, and they recognize the need to respond.”
Transfer pricing: the focus is risk
Sixty-four percent of respondents cite risk avoidance and mitigation as the primary drivers of their transfer pricing priorities. According to surveyed executives, the top three factors contributing to concerns around tax risk include: 1) increased information sharing among tax authorities, 2) information being made public, or reputational risk, and 3) a relative lack of centralized and consistent control in responding to tax authorities.
Jeff Michalak, EY Global International Tax and Transaction Services Leader, says: “In the past, the way most international tax teams approached their reporting was to release the least amount of information possible, which was ordinarily information that could support their case. Today, thanks to BEPS, the current OECD project and a climate of global tax reform, the paradigm has shifted. Now it is the tax authorities who have vastly greater control of the dialogue and, as a result, companies must adjust.”
Clouds of controversy
In the survey, 82% of respondents say they have experienced challenges to their transfer pricing over the past three years, with 40% of these saying that the resulting adjustments have led to double taxation. The most critical areas of tax controversy continue to be: transfer pricing of goods (64%), intragroup financial services (41%) and value added tax (VAT) or goods and services (GST) tax (34%). Going forward, survey respondents expect that these areas would not likely change, but cite two notable exceptions where they expect a significant increase in scrutiny: challenges to intellectual property (49%) and private equity (PE) controversy (39%).
Marlies de Ruiter, EY Global International Tax Services Policy Leader, says: “The sense we’re getting from everywhere we look is that tax directors are already struggling with controversy and it’s increasing. But the expected levels of controversy are intensifying, and we see conditions and circumstances that are likely to drive remarkable numbers of reviews, challenges, audits and double taxation.”
Global tax reforms having major impact on transfer pricing policies
The majority of survey respondents (59%) say that the greatest impact of global tax reform will be felt in fundamental transfer pricing rules. The second and third key areas of impact are permanent establishment (13%) and thin capitalization rules (11%). Overall, tax reform is creating profound changes, taking place not only in tax rates, but at fundamental levels impacting definitions of what can be taxed jurisdiction by jurisdiction.
When asked to rank the area of operations or tax strategy that is most impacted by global tax reform, the most frequently cited business component is the supply chain (41%), followed by treasury operations (29%) and intellectual property (IP) strategy (also 29%).
Peter Griffin says: “The degree and pace of change of global tax reform has become so great that it is now critical for businesses to think strategically to reflect the evolving landscape. As ‘uncertainty’ becomes the watch word for many, looking ahead to the short-, medium- and long-term impacts of local and global reforms is the only way to implement an adaptive and effective tax strategy.”
“The magnitude and pace of changes in the global tax environment seem unprecedented and place significant strain on organizations. To be able to efficiently adapt to these challenges and in the light of uncertain development, enterprises should come with well-designed strategy and carefully monitor the effect of tax reforms. And when I say carefully I mean national and global reforms – from short-term, medium-term and long-term perspectives “concludes Libor Frýzek, Head of EY Tax Services in Prague.
For additional information, visit ey.com/en_gl/transfer-pricing-international-tax-survey.
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22nd April 2020
1st April 2020