A Look Ahead: What 2021 May Bring for Transfer Pricing
Thanks to the Coronavirus, 2020 has been a landmark year. The impact of the pandemic is still rippling out globally, affecting health, education, business, the economy, and yes, transfer pricing.
What can you expect in 2021? More tax scrutiny. In the next few years, tax authorities will be under pressure to make up 2020’s lost revenue and transfer pricing is an easy money-grab.
One area of particular concern? Your transfer pricing benchmarking analysis. No doubt tax authorities will play close attention to comparable-company selections and how it impacts the arm’s-length range. How can you insure your 2020 transfer-pricing documentation will be immune to transfer-pricing penalties and adjustments? Follow these benchmarking strategies and you’re off to a good start.
Find the Right Comparables: It sounds easy enough, but often choosing transfer-pricing comparables is like forcing two pieces of a puzzle together that almost fit, but ultimately don’t.
Where do you begin? Given that more than 75 percent of potentially comparable companies are rejected by tax authorities for functional differences, a strong functional analysis is key. Deep dive into the business descriptions of every potential comparable company until you understand what each one brings to the table in terms of functions, assets, and risks. As with any type of search—when you know what you’re looking for, you’re halfway there.
Go Beyond Industry Classification Systems: As most transfer-pricing executives know, the one thing that stands in the way of a perfect comparable set is imperfect data. And there’s a reason that data comes up short: Common classification systems—like the Occupational Safety and Health Administration (OSHA) or Standard Industrial Classification (SIC) system—weren’t designed with transfer-pricing lenses, so they’re hardly the best tools for the job. And while you can’t dismiss industry classifications entirely—they can help reduce a large pool into a relevant set.
To find comparable companies that can stand up to today’s transfer-pricing scrutiny, you’ll need to consider a more holistic picture: Evaluate functions, assets, and risks; contractual terms, economic circumstances, even business strategies. You’re more likely to find comparability in the details.
Follow Country-specific Requirements: Comparables are one of the most commonly challenged parts of transfer-pricing documentation—and the easiest way to let tax authorities know you’re off the mark is to present a benchmarking analysis that doesn’t adhere to local requirements. Like most transfer-pricing regulations, benchmarking requirements vary from jurisdiction to jurisdiction. Some countries require local comparables while others are OK with regional ones. Either way, they don’t always exist. You’ll still have to prove that you tried to find comparables in the relevant region and, if they’re fictional, explain why your set is the next-best thing.
Embrace Technology: Technology is disrupting tax departments in multinational companies everywhere. However, it is more welcome than transfer pricing benchmarking. An AI-powered solution instantly solves a whole lot of comparability problems.
Transfer-pricing software is built specifically for functional comparability, identifying comparables outside of their industry-classification codes. Also, technology can produce larger comparable sets, making the arm’s-length range more reliable. Other considerations are the time and money you save on penalties and adjustments later, given your foolproof 2020 documentation.