Many countries have become more focused on combating tax avoidance. As such, transfer pricing compliance has become much more burdensome due to substantial documentation requirements and multiple filing deadlines. Multinationals ("MNEs") have to take action to control their transfer pricing risks, but the cost of doing so could substantially increase.
Before base erosion and profit shifting ("BEPS"), transfer pricing compliance was mostly local, requiring local transfer pricing documentation that focused only on the local transfer pricing position. In South Africa, MNEs would submit their corporate income tax returns, disclosing only the financial data of their locally affected transactions without the need to submit any transfer pricing policies to the South African Revenue Service ("SARS").
However, post-BEPS, various levels of transfer pricing documentation and filing requirements were introduced to disclose tax sensitive data, increasing the cost burden of multinationals to meet these requirement, such as:
- the country-by-country report ("CbCR"), disclosing tax data for each jurisdiction in which a MNE operates;
- the master file, providing a detailed value chain analysis of the group;
- the local file, analysing the local function performed, risks assumed and assets employed;
- local documentation requirements. In this regard, South African MNEs are also required to comply with the complex transfer pricing record-keeping requirement issued by SARS; and
- the filings of the local corporate tax return, disclosing the tax data of the local company as well as its inter-company transactions.
All layers of documentation are to be submitted to revenue authorities, providing them with a complete picture of the MNE's value chain. As such, it is important that these layers of documentation are aligned and consistent, all disclosing the same information. Filing of transfer pricing documentation must be synchronised across the group, increasing the work load of the MNE's tax team and increasing its compliance costs. Imagine the increased work load of a tax team within a multinational group operating in 15 countries through 28 legal entities, with filing requirement covering 1 March to 31 December.
It is now important to:
- consider using analytic software to synchronise the analysis of financial and tax data;
- determine the group's tax compliance by considering corporate international tax, value-added tax, employees' tax, transfer pricing documentation, CbCR; and
- manage in-house IT and human resources to assist the tax function and compliance.
To ensure that financial and tax data are synchronised, it is preferable to use one source to produce both sets of data. If not, it is important that data is collected in a way to ensure that the same information is disclosed where multiple disclosures are done. In other words, the information on the CbCR must be the same as the information disclosed on the corporate tax return. This should assist in limiting additional queries from revenue authorities as well as the need to reconcile information after it has been disclosed to revenue authorities. This may require:
- a proper value gain and transaction analysis;
- a comparison of both the tax accounting and the CbCR to the International Financial Reporting Standards accounting requirement; and
- a comparison of the group's performance to that of its competitors.
The tax compliance approach must clearly identify the controversy instruments that will be used to resolve tax disputes as well as a clear stance on when litigation will be considered to resolve tax disputes.
A global approach to transfer pricing documentation is also a must. Once the information has been synchronised, the transfer pricing documents can be produced globally to meet all the group's compliance requirements. This central control will improve the efficiency in how documentation is prepared and submitted.
In addition to these documentation and filing challenges, the challenges from within a MNE are multiple and must be managed and coordinated to be in control of all transfer pricing risks. The cost of compliance also includes the time and effort of in-house tax and finance teams. Effective transfer pricing compliance will require:
- succession planning to ensure continuity to deal with queries and tax audits effectively;
- education of the tax team and proper knowledge management;
- interaction with finance and IT departments;
- tax governance procedures; and
- a proper tax strategy.
A successful transfer pricing function should start with the development and maintenance of transfer pricing documentation and end with the drafting and implementation of the legal agreements support the pricing policies.
It is also important to standardise how reports are presented to ensure that all companies in the group follow the same approach. Also, the processes followed in filing tax returns and documentation need to be standardised across the group.
MNEs can organise their transfer pricing compliance team in one of the following three ways:
- use a central team that is fully responsible putting the transfer pricing policy together, making sure that it is applied throughout the organisation and that all transfer pricing filings are done with local participation limited to support only.
- have a smaller central team, only responsible for setting the transfer pricing policy and ensuring it is applied across the group with all transfer pricing reports and filings done by local teams.
- use a service centre to perform all of the actual work with a central team doing quality control and compliance with the support of a local team. Depending the model used, it can be decided what functions to outsource and whether software should be used.
It's important for MNEs to consider where they are on their transfer pricing compliance journey; whether they have organised their tax team to ensure that documentation is prepared and submitted timeously; and if they have considered use of software to prepare transfer pricing documentation or if it will be outsourced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.