Transfer pricing is the most important international tax issue for 60 per cent of Irish tax and finance directors and 85 per cent of multinational firms, according to a new survey. The survey, conducted by Ernst & Young and entitled, ‘2001 Transfer Pricing Global Survey’, states that companies are ‘losing out on opportunities arising from proactive transfer pricing management of post merger integrations, e-commerce and intellectual property.’
Only 13 per cent of Irish tax and finance directors include transfer pricing as part of their corporate strategic planning, as opposed to 29 per cent of international corporate parents. Transfer pricing is a key issue for multinationals - MNCs - as fiscal authorities are increasingly policing transfer pricing policies, and MNCs must also cope with the risk of exposure to double taxation and penalties. While no official date has been set for the introduction of transfer pricing rules in Ireland it is expected that they will be introduced at some stage as a means of defending the 12.5 per cent corporation tax regime.
According to Rose Tierney, director, Ernst & Young, ‘The survey results show a lack of readiness among Irish corporations. Transfer pricing can impact on every phase of business operations and failure to recognise its importance and to prepare for its introduction will result in missed opportunities for many Irish corporations.’ Transfer pricing is a term used to describe all aspects of intercompany pricing arrangements between related business entities.
‘Failing to integrate transfer pricing policies in the case of mergers and acquisitions is alarmingly common’ said John Hobster, ceo of transfer pricing services at Ernst & Young. ‘Half of all companies that reported a merger or acquisition in the last two years simply applied the dominant company’s transfer pricing methodology, and 23 per cent allowed multiple systems to continue. This increases their risk of being taxed on the same profits twice, and falls short of ‘best of class’ behaviour to harness the opportunities presented by such events.’
While e-commerce transactions across borders continue to grow, two-thirds of parent companies and half of subsidiaries surveyed do not consider the transfer pricing issues related to their e-commerce activities, and only one-fourth of parent companies expect the impact of e-commerce to become significant to transfer pricing.
It was found that management of intellectual property has been relegated to tracking and registering, not tax-efficient exploitation. Moreover, there is no clear and coherent adoption of IP management strategies that will optimise operating outcomes, minimize tax costs or satisfy tax authority inquiries.
The survey also addressed the debate over the need or not for complete alignment of transfer prices for both tax and management purposes. It found that 77 per cent of MNC parents use the same set of transfer prices for both tax and management purposes, which runs counter to the conventional wisdom that companies tend to favour separate systems for tax and management purposes. According to Bob Ackerman, co-director of Ernst & Young’s Americas transfer pricing practice, ‘This is the case because it is too complicated and too confusing to maintain multiple sets of books.’
‘While every MNC is different, in our experience, compromise systems rarely succeed. Operations are only partially motivated, pointing to transfer pricing restrictions outside their control. |
