Featured in Financier Worldwide
Our Transfer Pricing Director, Sahil Seth, has contributed an insightful article to the globally renowned magazine, Financier Worldwide, based in the UK. In this piece, Sahil explores the evolving landscape of transfer pricing (TP), addressing key trends, challenges, and strategies that multinationals must navigate in today's complex regulatory environment.
Key Trends in Transfer Pricing
The TP landscape is undergoing significant changes driven by digitalisation, evolving business models, and increased resource mobility. Authorities worldwide are tightening regulations, increasing scrutiny on related-party transactions, and demanding stricter compliance with documentation. The use of technology in TP processes is rising, enhancing efficiency and policy implementation. Additionally, there is a stronger alignment with international tax frameworks like BEPS 1.0 and BEPS 2.0.
Challenges for Multinationals
For multinational enterprises (MNEs), staying compliant while maximising tax efficiency is a delicate balancing act. Companies must document all related-party transactions, justify business rationales, and establish TP remuneration policies that align with their functional contributions. Each entity—whether low, medium, or high risk—must be appropriately compensated based on its role in the value chain. Understanding local compliance obligations is crucial, particularly for newly established or loss-making entities.
Rising TP Disputes & Resolution Strategies
Recent regulatory amendments have led to a surge in TP disputes, similar to the BEPS initiative’s impact. Common dispute triggers include incomplete documentation, valuation mismatches, and inadequate commercial rationale for transactions. To mitigate risks, companies should consider strategies such as value chain alignment, price adjustments, Advance Pricing Agreements (APAs), and Mutual Agreement Procedures (MAPs). Safe harbor applications can also help simplify compliance.
Navigating Tax Audits & Investigations
Preparation is key when facing a tax audit. Companies must maintain robust TP documentation, including benchmarking analyses, intercompany agreements, and financial records. Clear commercial justifications must accompany all transactions. Providing accurate and timely responses to tax authorities helps mitigate risks and strengthen a company’s position.
The Importance of Regular TP Policy Reviews
Given the rapid evolution of the TP environment, companies should review and update their TP policies annually. While benchmarking analyses may be refreshed every three years if no significant changes occur, financial data should be updated yearly to ensure compliance with the arm’s length principle. As business conditions shift, TP policies must be aligned with both macroeconomic factors and company-specific circumstances.