To prevent expensive mistakes, multinational corporations must have strong transfer pricing rules that complement indirect tax functions.
To increase compliance, tax officials have urged companies to examine how well their transfer pricing and indirect tax policies fit.
According to the OECD, multinationals now account for 60% of all commerce, increasing their proportion of the global GDP and the danger of non-compliance for businesses.
The urgency for firms to align their indirect tax operations with TP policies has increased due to the development in globalization and international interactions between linked parties.
Transfer pricing is not new, according to Indy Paddan, global head of tax of the London-based private members' club group Soho House, but the way tax authorities are enforcing the laws has evolved.
The necessity for documentation, appropriate policy agreements, and shifting company attitudes, according to Paddan, are the main factors.
She continues by saying that firms now feel more pressure to comply with the BEPS regulations.
In relation to TP, Paddan claims that "the landscape is changing, and more and more companies are taking it seriously."
According to Cristina Nila, group vice-president of finance at FintechOS, a Romanian provider of financial services technology, organizations must continually change their rules to be compliant and avoid penalties.
Due to the global reach of multinational corporations, it is significant to highlight that the trend toward greater convergence of indirect tax and TP policies has global significance.
Businesses have adopted strong TP policies at varying degrees. While other businesses have lagged behind in putting strong procedures into place, some have been remarkably advanced.
According to Paddan, the gap between huge international corporations and small-to-medium sized businesses is often the most significant.
According to Paddan, "Developing companies tend not to have established policies in place including transfer pricing."
Even in situations when emerging companies do have defined procedures, there frequently also exists a history of ambiguous compliance, according to Paddan. This includes the absence of charge-outs or fixed price and methods.
According to Paddan, "when people are doing charge-outs, they [finance staff] re often just making up their own methodology."
New tax leaders typically face a big challenge since they frequently need to untangle past transactions in order to correct mistakes or streamline systems.
Nila stresses the significance of having strong TP policies in place, particularly for businesses with operations in many countries.
"We know how important it is to have strong transfer pricing policies – not only from a tax authority perspective, but also because it helps businesses to better assess risks," according to Nila.
Authorities frequently inquire about TP rules during tax audits, according to Nila.
It is possible to connect TP and indirect tax policy, particularly when it comes to VAT or the goods and services tax.
One of the greatest obstacles to the integration of TP and indirect tax, according to a tax leader at a diverse business with Middle Eastern headquarters, is that teams typically operate in isolation.
According to the tax leader, "Any adjustments in pricing methodology on transactions that affect VAT is done without considering its impact on TP."
He continues by saying that this has a detrimental effect on the company, especially when it comes to tax audits, when this misalignment between the TP and VAT policies is most obvious to authorities.
Regarding the negative effects of incorrect policies across tax functions on total compliance, the tax leader emphasizes the importance for the VAT and TP teams to prevent risks resulting from subpar practices in their respective sectors.
According to Nila, it is the responsibility of tax teams to make sure that they routinely check their organization's tax policy, including TP procedures, before entering into transactions.
According to Nila, "Whenever you have transactions or inter-company transactions, then you have to go back to your transfer pricing policy and make sure you are following it."
This calls for regular policy updates to make sure they reflect the company's business strategy.
Making ensuring that staff members have a comprehensive understanding of business transactions and their justification is another crucial aspect of the efficient integration of indirect tax and TP.
Nila argues that in order to have a more comprehensive awareness of the company's strategic goals and how they align with various endeavors, tax staff members need to engage with people outside of their respective teams in the larger organization.
The link between customs values and a firm's TP valuation methods is also covered by the alignment of policies.
According to the tax leader, "Companies need to ensure that their valuations of goods are strongly aligned with their transfer pricing policies and methodology."
He claims that firms may avoid paying expensive fines on cross-border transactions by having strong policies in place to ensure consistency of TP and customs processes.
He continues that it is crucial for firms to set up efficient procedures to prevent any discrepancies, such as divergence on customs computations.
Additionally, businesses should avoid placing themselves in situations where they might be exposed to unfavorable and unpleasant tax computations outcomes.
The tax leader advises firms to do detailed customs appraisals on items before they are sent outside or received from abroad.
Many multinational corporations have reason to examine their TP policies as a result of the worldwide corporate minimum tax agreement reached by 137 nations at the OECD in October 2021.
To guarantee that companies pay an actual minimum tax rate of 15% in accordance with the OECD's global tax agreement, this has required them to harmonize tax rules across all of their territories.
The head of tax advises taxpayers to review their procedures and methods in order to deal with pillar two's effects.
According to him, it is forcing tax directors to harmonize their operations-wide tax compliance practices.
The impact of BEPS and pillar two, however, is a topic of conflicting viewpoints. According to Nila, the BEPS initiative's ability to boost confidence in the international tax system is still up for debate.
"If big taxpayers seem to be avoiding tax liabilities, then where is the confidence in the system and where is the effectiveness of the tax system?" she says.
According to her, government officials should base their policies on the idea that businesses must pay their taxes in order for the system to work effectively.
Regarding the credibility and efficacy of the international tax system, Nila said, "If you don’t meet these two requirements, then I don’t think we will have the best results."
Future tax directors will give indirect tax and TP integration increasingly more thought. Pressure on tax professionals to reduce risks by harmonizing indirect tax and TP regulations is increasing as the global tax environment evolves.
By fLEXI tEAM