Potential Transfer Pricing Pitfalls Multinational Corporations Can Avoid – Part 2

Because transfer pricing regulations exist all over the world, multinational corporations (MNEs) need to take into account the transfer pricing policies of the jurisdiction in which the activity generates income, as well as the jurisdiction that is charged for goods or services. From the perspective of one jurisdiction, a transaction may be at arm's length, while from another perspective, it may be considered taxable. A lapse of this nature could eventually result in unilateral adjustment by the tax authority. It is therefore necessary to ensure that any intercompany transactions pay an arm's-length tax rate.

Maintaining transfer pricing documentation for all group entities can be long-drawn and expensive. For this reason, many MNEs prepare group-level transfer pricing documentation based on the transfer pricing guidelines issued by the OECD. Such reports focus squarely on the group HQ, with only limited data or information pertaining to foreign entities. Not only is this expensive and time-consuming, but it also places transfer pricing risk on the MNEs, who are often ill-equipped to handle the complexity of transfer pricing policies.

While ensuring compliance with HQ requirements, this approach may not contain sufficient information required by the foreign tax authorities to conduct their own examination. Therefore, you need to document as much information as possible related to the intercompany transaction and business activities to avoid further investigation from the local tax authorities.

Implementing BEPS Action Plan 13, large MNEs must maintain three-tier documentation: a local file, a master file, and a country-by-country report. Automatic exchange of information between the tax authorities of various countries opens access to jurisdiction-specific information to different countries' tax administrations. Certain countries require MNEs to file a separate form for the related party transactions. Understanding BEPS Action Plan 13 can help multinational companies organize their documents for payroll, tax, accounting, financial statements, etc.

Internal documentation, including transfer pricing reports, is an area that often creates disagreements from both a compliance and operational perspective. As various documentation and reports circulating in the system, discrepancies between the transfer pricing report and other related reporting requirements could be a potential red flag. Thus, MNEs should make sure the transfer pricing study report is aligned with the different reporting requirements to stay off tax authorities' radar.