Matthew DeMello: Welcome back everyone! We’re here again with CrossBorder Solutions Chief Economist Mimi Song going over our new year’s resolutions for this year of 2020, what we should think about going into 2021 and keep front of mind.
And just to start things off, our first resolution is: I will work to integrate the tax department into the business. And here’s Peter de Nicola of Fujifilm from episode 32…
Peter Denicola: To get into the trenches with your operations people. You have to know what’s going on. The last thing you want us to be blindsided. That’s the important thing: have control over what’s going on. Don’t let the situation control you. You have to be a good advisor to your team and try to keep them, as I said, on the straight and narrow path…
Matthew DeMello: Mimi, we’re also working as CrossBorder in R&D. This is a very familiar practice, at least in that realm of tax, to be able to reach out to other departments where to folks get started in our process like that.
Mimi Song: Well, it’s not just related to the difference between transfer pricing and our R&D departments. But really I mean, as a transfer pricing department or a tax department, you have to communicate with all of the different departments… marketing, finance, accounting, operations, sales, like all of those different departments will need to be on your side, if you will.
Can I tell you the worst-case scenario is when nobody likes you and no one wants to talk to you and that’s not the position you want to be in. And as part of the tax department, because people already feel like you’re intruding on their day to day activities as it begins with. So what you want to do per what Peter said is become that trusted tax advisor, make sure that there’s a certain level of education that you’re providing. And clearly you want to bring value back to these people, right?
This conversation shouldn’t just be a one-way street. It’s, “Hey, by the way, Matthew DeMello, podcast extraordinaire… tell me a little bit about what you do.”
And clearly you’re going to have an opportunity to shine in that regard because you enjoy what you do. But at the same time, we’ll need that information for the transfer pricing documentation.. but maybe one day, you’re going to want to call me and say, “Hey, can you tell me about those taxes we paid?” Or, “Can you be a podcast guest?” And so, you always have to think about it as a two-way street, and that’s how you get everybody’s buy in, I would say.
Matthew DeMello: I would also be remiss not to mention our talking point that we recite on the TPU webinars along those lines of at least getting ingratiated enough in these departments to be able to ask what’s on folks’ LinkedIn pages because LinkedIn pages can be looked at by tax authorities. [LinkedIn pages] can even appear in an audit. They can potentially trigger an audit when what’s said on LinkedIn doesn’t line up with the functional analysis, right?
Mimi Song: Oh, that’s right. Absolutely. And you have to be very mindful of that. And so, you know, especially in the technology team, right?
Matthew DeMello: Right.
Mimi Song: By the way, sometimes talking to the engineers are the most difficult conversations because they have their own special code language if you will. But nonetheless that, you know, it’s, it’s, I think that the conversation helps when as a tax professional, you approach it with an open mind and with some keen interest in that actually particular area, not only for purposes of completing your job but really just generally speaking.
Matthew DeMello: As we often say, transfer pricing is a huge opportunity to understand your business, which leads us to our second resolution: I will document transfer pricing accurately and contemporaneously. I will now turn things over to Dr. Lorraine Eden from episode 33…
Dr. Lorraine Eden: Failure to document… Compulsory documentation has to be done and has to be prepared, even if you don’t have to give it out. But if you don’t document, you leave yourself open to the tax authority coming after you. So failure to document’s clearly number one.
Matthew DeMello: We can’t say this enough, Mimi. We can’t make this a resolution every year if we could, but…
Mimi Song: Are we beating a dead horse here at this point? Just trying to figure that out.
Matthew DeMello: But it’s worth it.
Mimi Song: It is worth it, right? Because based on what we know, multinational still aren’t being contemporary and he is about the documentation. And yet it’s just not as much of a priority. And can I tell you over the past year, right. With the pandemic and with all of these other issues looming over our heads documentation, probably wasn’t on the top of mind for most, most people let’s be honest, right?
But it’s important to make it a priority. It’s important to actually try to understand that it is a priority because the next thing you know, you turn around and the tax authorities are going to require it and ask, “Where is it?” and they’re not going to give you a lot of time to do it. Because if there’s one thing we know, we know that tax authorities are more keen on making sure that taxpayers are doing the right things and being compliant, even in these distressed times.
Matthew DeMello: That’s right. Especially countries that have been more generous when it comes to a lot of wage-based subsidies, even among the countries that are the most strict when it comes to transfer pricing. Australia comes to mind…. Canada, we’ve often mentioned their programs that they have in place for COVID relief, alongside of how stringent they’re be going into 2020, 2021…
Mimi Song: They have to be because they’ve because of these subsidies, right? They’re going to have a huge budget deficit. And so that’s going to create long-term challenges and then they’re going to have to apply certain tax reforms to make sure that taxpayers aren’t double-dipping in some regards between, getting that subsidy and then deducting expenses. And you know, there’s going to be lots of questions also about how to treat those expenses. So it’s going to be a challenge, that’s for sure.
Matthew DeMello: For sure. You should prepare contemporaneous documentation, which leads us to our third resolution: You will prepare robust country-specific documentation. Here’s Doug darling from Acelity and 3M…
Doug Darling: Tell your story, support your position. It goes a long way. And it’s really a simple, simple thing. Now, of course, if you have results that aren’t good, you have to be able to explain those and stuff, but then you know where your weaknesses are. If you understand that and know you have to document it, that also helps you prepare that argument. So to me, I know that’s been a common term, but documentation is so, so important. I’m a writer, I’m a wordsmith. So documentation me is not just a rote exercise or just a compliance exercise.
Matthew DeMello: I would agree with him also just, I mean, I’m a storyteller. We talk about storytelling all the time here at CrossBorder especially on the podcast, but it all comes down to the documentation and telling the specific stories each specific country wants you to tell.
Mimi Song: Well, I think that’s the key takeaway here, right? It’s understanding the country-specific requirements, localized benchmark requirements, local thresholds… What type of economic analysis are they going to be looking at? What type of method preferences do they have all of this insight information? If you will, which really isn’t insight information, it’s preparatory information.
So it’s to make sure that you are prepared and what the challenges could potentially be based on those country-specific requirements, because that’s really where you’re going to open up potentially a Pandora’s box and say, “Whoa, I did not expect to see that I should have looked at this a little bit more closely. And now that you have done this, you can react properly and make some accommodations whether or not that’s in your documentation or in the actual fighting, creating a transfer pricing adjustment, or something of that nature. But you’re, you can be better prepared to mitigate that potential risk by being more well-informed.
Matthew DeMello: That’s right, and even where you’re differentiating the story of your company between countries to meet country-specific specific requirements.
Our fourth resolution is that I will make my transfer pricing documentation consistent across the board. Here’s CrossBorder’s own Pamesh Sharma.
Pamesh Sharma: I think, from a documentation perspective, I still see inconsistencies and gaps between say, for example, the transfer pricing report and the local files. So then contingencies can be just in the write-ups your discussions about intangible assets when you marry up between the more small local file. So we’ve seen those in consolidate, but also just the numbers that we have, the information that’s filed on tax returns and the related party filing. How does that match to what’s being told in the master file local file?
So we see those gaps and inconsistency time, and again, in preparation or time for pricing files, that’s one key thing.
And also another thing I hear is that CFOs and Heads of Tax saying, maybe for a particular benchmark – it could be routine standard head office services, 5 percent markup — “We’ve never been challenged in, in the past 10 to 20 years. We don’t need to update this benchmark regularly,” or “We don’t need to review it for any gaps. It’s just low risk where we shouldn’t do it.”
And, I think from what we’ve learned today with BEPS and with Brexit and with content change happening, that we can’t let what happened in the past guide the future. We really need to be proactive here, especially if it’s those things, those areas around inconsistency and being practicing. I see those as mistakes. And I think that that’s something departments need to be really proactive about.
Matthew DeMello: He said you’re magic word, Mimi. Proactive!
Mimi Song: That’s right. And to be honest, as I was relistening to what Pamesh had set stated in the past… So based on what the mesh was saying about history and how CFOs basically said, “Well, we never were challenged in the past. It’s low risk. I’m not really too worried about it.”…
Let’s learn from Coca-Cola a little bit here. Right?
Matthew DeMello: Right.
Mimi Song: Now they’re being subjected to a $3 billion adjustment. And this is because their argument – I’m kind of simplifying this – their argument was to say, “Hey, we relied on IRS’s position back when they audited us in 1996.” But it’s not 1996 anymore! And their area of focus has shifted and the landscape has changed.
And now we’re talking about where tax authorities are looking at transfer pricing under a much more scrutinous eye. They are looking for inconsistencies. And they’re trying to understand if taxpayers are really taking advantage of tax loopholes. And I don’t know if I’ve ever mentioned this before, but have you ever heard of the tax inspectors without borders?
Matthew DeMello: No, but what an intriguingly titled organization….
Mimi Song: So that is actually an OECD and a United Nations effort related to helping countries come together and doing audits simultaneously in multiple countries.
So this is where we’re talking about. Now they have cooperation for audits. And in fact, in 2019, they levied about $500 million of tax adjustments that they were able to identify. So this is real, right? I mean, we’re not just talking about a potential risk of tax authorities. Looking for inconsistencies tax authorities are literally now working together to find areas that should be adjusted based on their understanding.
Matthew DeMello: And in light of that scrutiny resolution number five is I will adjust my transfer pricing policy to reflect the new realities of my business. Here’s Hasker Hoogenberg from CrossBorder Solutions…
Hasker Hoogenberg: What I also see quite a bit is, especially those companies that have grown very fast in a short period of time, that they have not paid much attention on creating, uh, appropriate intercompany agreements. So because the legal basis in which you set out what the companies, how they interact with each other is very important. And a lot of tax authorities, or besides asking for the transfer pricing documentation, when they do a review will also immediately ask for the intercompany agreements. And if you can’t produce them, if you don’t have them, then you know, a lot of authorities often simply deny you the tax deduction, because they say there is no legal basis for this deduction.
Matthew DeMello: I think we talk so often or have over the course of quarantine about housecleaning tasks. Cause we’re all stuck at home. And I can’t think of a more rudimentary house cleaning task for corporations then intercompany agreements.
Mimi Song: Yeah. That’s, that’s the worst. Well, I think the challenge is because it’s always a question of “Who owns those agreements, or the execution of the agreements?” But I digress. I think the point here is that Husker makes a great point to understand, “Hey, how has your business changed in 2020? Do the profits actually align with value creation in this current environment are limited risk distribution arrangement or limited risk entities. Are they still, in fact, the limited risk or has there been some restructuring in response to the pandemic? Have there been changes to the supply chain that are impacting your overall business? Have people been relocated or have functions been relocated to be able to accommodate for the current environment?”
And you know, I think that we can’t expect that your business is going to look exactly the same post COVID. Let’s be honest. I think even life, as we know it is not going to be exactly the same post-COVID. I hope it’s not because I want us as people and as businesses to make sure we learn from our mistakes in the past. And hence we’re having this 2020 resolution podcast, right?
Matthew DeMello: Well, Resolution #6 is I will accept and prepare for tax uncertainty. Here’s Sayee Pressana, research and teaching associate at the Transfer Pricing Center at Vienna University of Economics and business, from episode 40.
Sayee Prasanna: Usually the answer would be documentation and internal risk assessment, but I would say the root cause of issues, which are recurring, is that not having the right people for doing transfer pricing or other treating Trump’s advising as Amelia complaints activity wildly should be more integrated in the strategic functions of anemone. Also emoney should accept uncertainty as a way of life for the next 10 years, because now we have seen in the Boston yells that there was BEPS and a lot of activities, which came out until 2017. And just when we started aligning ourselves to these standards, we are wondering about what happens with the digital and each of these pieces of digital work flowing in, in the next half a dozen years. So we arre eventually entering into a zone where M and S should know more vine about the uncertainty piece, but rather just accept that this is what it is going to be and try to align the priorities accordingly.
Matthew DeMello: I’ve got to say, Mimi, ten years might be too short.
Mimi Song: That’s right. What was the adage? The old adage goes, “There are two certainties in life: death and taxes.” Well, unfortunately right now we’re talking about tax uncertainty, so that doesn’t hold true anymore.
But I guess this is more on a multinational level of tax uncertainty. I think risk is everywhere in understanding which tax authorities are, are, are going to be the most aggressive. Where do you actually have risks – regardless of the actual transaction amount, but the type of transactions – which ones are going to create the most buzz? Do you have high-risk transactions? Have you done IP migration transactions? Don’t forget on financial transactions. Do you have relationships and CA transactions with counterparties in tax havens? Those are the types of things that you clearly want to, you want to manage because there’s a lot more uncertainty with how the tax authority is going to perceive those types of transactions.
Right? And then you know, once again, documenting that appropriately, ensuring that the economic analysis makes sense, given your business context, all of that is going to be really important to help manage this level of uncertainty. And then, and that is really a tax director’s worst nightmare, by the way, it is uncertainty. It’s not, “Hey, if I’m expecting India to adjust me by $10 million, because they’re expecting costs plus 20 percent, and I’m only charging cost plus 15 percent, at least that is not an uncertainty. That is an expectation and you can post a reserve against that. And you can sort of keep your eye on the prize in terms of anticipated risk. But the uncertainty of whether or not they’re actually another jurisdiction like Korea is going to take a more aggressive position and then challenge your transfer pricing framework. That’s what keeps tax directors up at night.
Matthew DeMello: And not only do you need to manage uncertainty, you need to manage up which us to our seventh resolution: I will work with the C-suite to be proactive about tax issues that might cause controversy. Here’s Alex Parker of Bloomberg tax from episode 44…
Alex Parker: You could definitely make a case that companies are much more reactive than proactive in terms of, you know, issues that might cause controversy. A lot of times, this world of international taxes used to be seen as this kind of self-contained thing that only kind of the, the transfer pricing nerds out there understood. And nobody else really cared that much about it.
And it’s changed a lot, obviously since then, and now it’s like corporate boardrooms care CEOs care, the C-suite cares, but a lot of times they only care once it’s in the newspaper. And so I think maybe companies could be more proactive thinking about like, what are the issues that people would criticize us for and just deciding like, well, do we want to do this? Or do we, do we want to have a response to it? Or at least just thinking through things like that.
Matthew DeMello: Can’t emphasize this enough as a marketing professional, but transfer pricing tends to be a sore spot in that department for a lot of companies.
Mimi Song: Yeah. You either really care or you don’t care. It’s like two extremes, I think. And to be fair, I think that yes, transfer pricing is an annoying requirement… but it is a requirement, number one. And then on top of it, it’s not as complicated as people may think it could possibly be.
Yes, the idea of where value is created and the challenges associated with that is challenging. But in terms of meeting the requirements and checking off all the boxes and telling your story and being able to understand the basic premise of transfer pricing is the practice of ensuring that your related party transactions are treated the same as unrelated party transactions.
It’s a very simple concept and to educate the C-suite and to get their buy-in is to make sure that a complicated framework such as the transfer pricing landscape is today can be distilled down into just that simple terminology or understanding of what is transfer pricing: How does it impact my business? How can it help my business?
Because we understand it. It can not only hurt the business, but it can help and get that level by an upfront and make sure that everyone is well educated enough to understand that transfer pricing issues can create significant reputational damage. And so, you know, companies like Shell, this is why we see a much more proactive approach as it comes to tax and taxable positions, they have this whole paper related to their tax contribution report just to ensure that the public perception from their shareholder perspective is that they are paying their fair share of taxes. And here’s where we’re paying our taxes.
I hate to pick on Amazon, but it’s easy to pick on them because they were in the newspaper as, “Hey, Amazon’s paying zero percent taxes.” I mean, everyone probably saw that headline. And yet they haven’t really made a statement about their tax bill position. But, you know, I think that’s because Amazon is also vilified in a lot of different ways, right? But nonetheless, I think right now everybody understands and the C-suite needs to be educated. On fact, that tax is becoming a much more important topic as it relates to the reputational wellbeing of that multinational corporation.
Matthew DeMello: Right. And to be able to prove arms late and to be able to understand arm’s length, we need to keep in mind our eighth resolution. And that is: I will consider both sides of the transaction. Here’s CrossBorder’s own Valeria Marino from episode 47.
Valeria Moreno: So most of the time the biggest problem would be seeing companies on one side of this transaction, you always have two parties. So you have to compete on faxing with each other. And they see most of the time on one side. So maybe the parts for them or the country where they have more presents are different. But the is like when they, when they look at the traffic pricing, they should look at both because it happened. And sometimes you are a member of the range of learning a lot of money. What’s the problem. Yeah. The problem is because you are earning very high, you have no issue in UK, come to you saying, “Hey, you’re hurting too much”… but on the other side, you can have so both sides of the transaction.
Matthew DeMello: I don’t think we can emphasize enough. This could be a resolution every year.
Mimi Song: Oh, absolutely. Well, you know, it’s funny. Cause I think companies have started to learn about this, right? I mean, this goes to the fact that tax authorities are sharing information. They’re doing joint audits. They’re basically auditing one company and one side. And if, nothing comes up, that doesn’t mean you’re okay. On the other side, the point here is this current environment is all about global collaboration of texts and global education of tax authorities.
And that’s partially what the OECD BEPS action plan has done, which on a positive note, it’s created more collaboration and it brought more countries to come together. Think about this holistically. On the other side, on the downside, multinationals are the ones burdened with all these additional requirements. Right? And so I think the idea here is just because you are above the range and you’re okay. And say from one side of the transaction, doesn’t mean you shouldn’t address the other side of the transaction, the counterparty side of the transaction. I think you need to make sure that the story proves that you are in fact operating at arm’s length, regardless of which side of the transaction you’re looking at.
Matthew DeMello: I will say that listening in subscribing to our short form sister podcast, the Fiona Show: Hot Off the Press with all of your transfer pricing regulations and headlines from around the world in under 10 minutes, we’ll make keeping the ninth resolution we have very easy, which is: I will stay on top of transfer pricing regulations around the world.
Here’s Dennis Blackburn of Technical Consumer Products from episode 48…
Dennis Blackburn: Letting the new rules get out of hand. I’m not staying up to date with it. You know, figuring it out. Saying, “I can catch up. I don’t need to do it.” [Do it,] now!
I can look at it three months from now, gotta stay on top of it. You get another country that puts through a law that is going to require you to keep track of something and you aren’t ready for it in trouble so much.
Matthew DeMello: I remember him saying that when he was on the episode and my heart kind of sank a little bit, because I could hear like how hard he was trying. Yeah. It’s, it’s hard to keep up.
Mimi Song: It is difficult because Dennis is in the same position as, you’d think, a lot of tax professionals are where they’re being tasked with so much, but they’re not being given more resources or tools to be able to do their jobs effectively. And so this is why I think in the tax world, just generally speaking, technology plays a much bigger role these days, because how is it possible that you’re going to be able to meet all these enhanced requirements on a global basis and expect that you reduce internal head count or maintain internal head count at status quo and reduce external budgetary expenses? Like it’s a little bit of madness that companies ask tax departments to do this, but it is a, it’s a real ask and it’s a real challenge.
And the only way, like I said, that companies are going to be able to meet that challenge is to embrace technology. And this is why transfer pricing technology helps you stay on top of the changes in the regulatory rules, you know, partnering with the right firm to make sure that they’re, they’re looking out for your best interests in terms of what are the requirements here? Do you have, do we have you covered, those are all the things that you need to be worried about, not what are the actual real changes, but does someone have my back, does my technology on my back? Do I have enough going on operationally and procedurally that I’m well, uh, I’m going to be well-informed to be able to make the right decisions for my organization.
And – I think it’s worth remembering too – that tax authorities are leveraging technology themselves. And in many cases, advanced technologies, you can go to our episodes about artificial intelligence to get very precise definitions of what that all means. Brazil’s bear, right? So that’s what they call it.: the bear.
Matthew DeMello: And if you go back to our Canada episode, the CRA agent we had on that show was telling me how – and this also includes the infamous secret comparables – but their data is to the point where if they’re asking for an audit, they already know what they’re looking for. And they want to see if you know what they would be looking for.
Mimi Song: That’s that’s even worse. If you don’t get to the same answer, it’s probably even worse. And the only way you’re going to get there is, is leveraging some sort of technological solution.
Matthew DeMello: That brings us to our 10th resolution. I will treat related party transactions as I would a third party transactions. And here is some upstart. I think this is an intern anyway. I’m not really sure who this is, but I’m sure they have great advice.
Mimi Song [on recording]: Once again treat related party transactions, similar to how you treat unrelated party transactions, negotiating third party contracts, negotiating your related party contracts. I think there shouldn’t be any deprioritization of related party contracts just because it’s your related party. I think that could open up that could open up a lot of questions.
Matthew DeMello: Yeah, Mimi. [Sarcastically] I’ve never heard you ever say this before and you’re going to need to help me here. Make sense of what you could possibly mean!
Mimi Song: [Laughing.] Yeah. I feel like we, I feel like we just repeated what I said at the beginning of the spot a little, but just within the context of related versus third party, I guess, making a big difference.
Yes, that’s true. I say this time and time again, because I mean, that’s the arm’s length principle. That’s, that’s the basic premise of the arm’s length principle: What are your various intercompany transactions? What are your third party transactions? What actually are you negotiating and how have you responded to the current pandemic environment? And, and it’s important that related parties aren’t treated any differently, right? That’s the bottom line. Why would you treat them differently? That’s the point of the transfer pricing rules and regulations to say, don’t treat them differently. They should be treated exactly the same as you would treat a third party transaction. But as, as most people realize as a multinational enterprise, because the, the profits go from left pocket to right pocket, but they still say stay within the same pocket of the multinational umbrella.
Perhaps people aren’t carrying as much in. And that’s why transfer pricing has become such a challenge for all of these global sovereign tax authorities. Who have only been paying attention to what’s in their pocket. And, as it pertains and now they finally see, “Okay, well, we want to understand what share of the whole entire pie we got. And did we get enough?” So it’s almost like when my five-year-old says, “Oh, my big sister got a bigger slice of the pie or got another scoop of ice cream than me. That’s not fair!”
Matthew DeMello: So she’s in favor of ice-cream formulary apportionment. That’s what you mean.
Mimi Song: [Laughing.] That’s exactly right. It’s ice-cream formulary apportionment.