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Approaching the challenges of transfer pricing in an effective manner

Further, the number of countries that enforce transfer pricing rules has risen dramatically over the last three decades to more than 70 countries. There is a need to improve the capacities of the fiscal court with legal expertise in TP pricing as well as judges that hear tax cases. For example have someone experienced and well-exposed on TP issues assist the judge in dealing with TP disputes.

1. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities.
2. Furthermore, the broadening definition of intangibles will encourage the re-evaluation and assessment of functions previously characterized as being routine in nature.
3. In addition to the above concerns, Akunobela (2012) submits that some of these treaties are ineffective because they were entered into being driven by political motives with little attention given to BEPS.
4. The six reasons listed below explain why transfer pricing remains a top concern for multinationals.
5. While the following list is not exhaustive, it represents the top five non-technical transfer pricing challenges that companies with international operations must navigate.
6. Reiterating the importance of having sufficient financial resources, Fisher, Lerner, and Tidwell (2020) adduce that “for those important high dollar cases the IRS is well-resourced and determined and can be aggressive, procedurally and substantively.

While the BEPS action plan has transfer pricing implications for all MNCs, several important issues are particularly relevant for oil and gas companies. THE WRONG INCENTIVE
The two most common approaches to setting and revising transfer
prices are to apply cost-plus and market-based procedures. While
cost-plus prices have the appeal of simplicity and ease of
calculation, be aware that cost-plus transfer prices can provide
exactly the wrong incentive for the producing unit. Because of the possible effects it could have on tax collections, economic expansion and social welfare, transfer pricing is a complicated problem that has recently attracted much attention.

Affirming the upper hand that MNEs tend to have over TP auditors Sikka and Willmott (2013) and Jones et al. (2018) portend that accounting firms such as Deloitte, Ernest and Young, Price Water House Coopers, and KPMG are multi-jurisdictional and cross-disciplinary. This gives them the advantages of spanning across jurisdiction, hence insights into the tax laws of various countries and those of skills diversity respectively. The firms tend to have accountants, tax experts, lawyers and legal advisors, computer and financial analysts as well portfolio managers under one roof.

The U.S. company also surveys market data of other distributors around the world to support its analysis in attributing profits to the subsidiary in Denmark. Specifically, the company uses three-year moving averages of the profitability of dozens of other similar distributors to determine a reasonable range of profitability. In 2019, the manufacturer found that the three-year moving average of distributor profit margins supported attributing a 2.5 percent profit margin to its subsidiary in Denmark. On the distribution side of its business, the U.S. company has a subsidiary in Denmark distributing its products in Northern Europe but relies on a company in Italy to do the same in Southern Europe under a contract. While the U.S. company owns the subsidiary in Denmark, it has no relationship with the distributor in Italy apart from the distribution contract.

Approaching the challenges of transfer pricing in an effective manner

These experts might have formidable experience and expertise to help raise rigorous and well-reasoned commercial arguments that are backed by legal precedence as well academic and practical theories. These experts can also significantly formulate forensic submissions in a focused and accurate manner, enhancing audit and dispute resolutions. The experts can do an outstanding job to the benefit of the tax authority in a quest to make a name for themselves. The key to attracting them is improved remuneration and working conditions, which are often a cause of disagreement in developing countries.

As expected, the 2013 GTPS indicates a clear shift toward prioritizing risk management in transfer pricing, with heightened concerns regarding controversy and double taxation. A third challenge of transfer pricing is to manage the operational complexity and coordination of intercompany transactions across multiple functions, divisions, and locations within an MNC. Transfer pricing involves not only setting prices, but also implementing, monitoring, reporting, and reconciling them among various internal and external stakeholders, such as business units, finance, accounting, tax, audit, and regulators. MNCs need to establish clear roles and responsibilities, effective communication and information systems, and robust controls and governance structures to ensure that their transfer pricing processes are accurate, efficient, and transparent.

On the other hand, economic settings involve an assessment of the size of the market, consumer purchasing power, and geographic place of operation, demand and supply considerations among other factors. Just an appraisal of these two points out challenges of objectively establishing the price as well as following an audit trail for TP justification. Despite the presence of Mutual Agreement Procedures (MAPs) and Advance Pricing Agreements (APAS) and at times arbitration being considered possible ways of bringing clarity and predictability in investments and TP regulation, their effectiveness is still controversial and contested (Sundaram, 2012). Shongwe (2019) points to these agreements being probable ways to minimise lengthy and resource-intensive legal battles. APAs are agreements made by the taxpayers and the revenue authority or authorities on the right TP for some agreed future transactions.

Some further key tips in dealing with the challenges:

As there are many options in the market, a vendor selection process can help assess the most appropriate technology tool based on a Group’s requirements, future ambition and budget. To summarize, the status quo with respect to historical transfer pricing models will shift, and a new paradigm of incentives and increased controversy with respect to the arm’s length standard likely will arise. In this article, we’ll examine the five biggest challenges and problems of transfer pricing that tax directors and transfer pricing directors must manage and offer tips on how to deal with each challenge. Where such cases proceed to court there can be significant challenges with gathering evidence, and obtaining witnesses who can reliably testify to events dating that far back.

They conclude that multinational corporations (MNCs) with abroad operations are more likely to dodge taxes and use transfer pricing tactics intentionally. When Omar and Zolkaflil (2015) looked into the tax characteristics of multinational firms with subsidiaries in tax haven countries, they found that these corporations had lower reported earnings and paid less in taxes, which suggested a higher propensity for profit shifting. Shunko et al. (2014) investigate the make-or-buy choice in multinational companies with an overseas manufacturing plant and outline the best transfer pricing solutions that accomplish the dual goals of energizing divisional management and utilizing favorable tax rates at offshore locations.

This supposed weakness in the capacity of the fiscal court becomes a constraint when dealing with TP issues especially MNEs with highly knowledgeable and experienced tax departments that are backed by equally strong and well-versed tax consultants. These tax specialists are often no match for the less experienced tax officers and fiscal court officials as pointed out by a number of researchers (Ajdacic et al., challenges of transfer pricing 2020; Jones et al., 2018; Sikka & Willmott, 2013). The delays and lengthy periods taken to conclude TP cases are not only disadvantageous to taxpayers but also prejudicial to ZIMRA as it robs the authority of the opportunity to evaluate its legislation and success in the resolution of disputes (Mashiri, 2018). Monitoring and evaluation are essential for improvements in the legislative and operational arenas.

Transfer Pricing Audit Challenges and Dispute Resolution Effectiveness in Developing Countries with Specific Focus on Zimbabwe

Dispute resolutions of TP cases are prone to delays and sometimes the cases are lengthy (Kabala & Ndulo, 2018; Mashiri, 2018, Shongwe, 2019). Inadequacies in resource refer to lack of TP skills and expertise among revenue officers as well as tax auditors, human resources (shortage of enough human capital in revenue authorities to create separate TP units), technical and financial resources (Asongu, 2016; Mashiri, 2018; Oguttu, 2016). Due to the time and resource-intensiveness of TP audits, they tend to be less frequent in developing countries (Shongwe, 2019).

Challenges Of Transfer Pricing To Consider

The challenges are even heavier for audits and dispute resolution because in order to assess compliance or build a case the standard measure or suitable criteria of evaluation must be clear. Both TCs and ZIMRA officers agreed on the challenges emanating from lack of clarity in regulations as well as the scarcity or absence of comparable databases to peg controlled transactions against as demanded by the Income Tax Act. For this study, participants were only interviewed after they gave their informed consent, signifying voluntary participation having fully understood the benefits of the research, its objectives as well as the fact that no likely negative repercussions were anticipated. All interviews were conducted between June 2019 and February 2020 face to face, before the Covid-19 pandemic. The researchers also transcribed some notes for key points and they compared these with each other during the analysis process. All participant information was kept confidential and during data analysis, participants were depicted using code names to make sure that they remain anonymous.

A combination of both primary and secondary data helped boost the validity of data, allowing for comparisons and confirmability advantages through triangulation of data sources (Denzin, 2012; Ryan et al., 2007). Mashiri (2018) contends that developing countries’ local tax courts tend to take longer periods in resolving TP cases, maybe due to a lack of knowledge and expertise among court officials and judges, considering the adoption of TP legislation is still in its infancy. In agreement, Shongwe (2019) points out that the governance process is neither effective nor robust enough in developing countries to enable TP cases to be speedily and appropriately resolved. The researcher further contends that effective dispute resolution is linked to the availability of the right skills in the courts, strong and clear TP legislation and access to information as well as strong capacity for tax administration and audits.

Regulatory compliance

Its prudent
to understand the subject nownot when the taxing authorities are
breathing down your neck. In the illustration, suppose Beta produces plastic parts at a cost
of $10,000 and ships them to Gamma, which processes them further at an
additional cost of US$1,000 and then ships them to a nonaffiliated
Canadian customer, which pays Alpha a total of US$20,000 for them. A
transfer pricing https://1investing.in/ mechanism will attribute some of the $9,000 profit to
each unit and to the tax return for each country. The studies investigate the trade-off between incentive roles and transfer price tax rolls, as well as the effects of border modifications on tax collection and commerce. The table highlights the significance of addressing real-world issues and empirically verifying theoretical models.

When they leave or retire, there is a risk that the process cannot easily be continued without them, particularly where large and complex models are in place. This can be compounded where there is a lack of process documentation (which set out the necessary steps to execute an OTP process) and/or lack of training to transfer the knowledge to the wider team. Given the breadth of the data required for Transfer Pricing, and the different teams across Tax and Finance often involved in carrying out OTP processes, the challenges can be wide ranging and have a real impact on an organisation. The US Inflation Reduction Act of 2022 that offers funding, programs, and incentives to accelerate the transition to a clean energy economy. Under the Inflation Reduction Act (IRA), signed into law in August 2022, the IRS received an $80 billion appropriation. The tax agency plans to use half of this amount in compliance enforcement, and this may include increased scrutiny of multinational companies’ transfer-pricing activities.

Overall, governments will continue to compete for direct investments, although the way those incentives are provided will likely shift and face controversy in themselves. While tax is only one of the many considerations affecting business investments, the influence of systems of taxation that are based on formulary approaches rather than the arm’s length standard can lead to the misallocation of factors of production and therefore impede economic growth. Financial reporting rules under ASC 740 require companies to identify and report on the financial statement certain uncertain tax positions (UTPs) over a minimum recognition threshold. Given the size of transfer pricing issues and the IRS scrutiny of transfer pricing transactions, transfer pricing has become one of the most significant UTPs. We are also forced to live in the present as the everyday issues remain, and there is also the increasing compliance burden outlined above.