Peter Kurjanowicz, Partner, Transfer Pricing
“What has changed most in recent years is that tax authorities and auditors are shifting focus from technical valuations towards the overall governance of the transfer pricing function.”
Although transfer pricing dates back to 1917, the practice has grown impressively since the OECD published the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995, and its updates in 2010 and 2017. Today, transfer pricing is likely the #1 tax risk area for multinationals and its scrutiny has prompted tens of thousands of pages of interpretive guidance, precedent-setting court cases and privately-published technical thought leadership.
Arms length standard
Transfer pricing laws are based on the ‘arm’s length standard’, which can be difficult to put into practice. That’s why transfer pricing is often considered an art, not a science. While this sentiment may be unfair to the economists and valuation experts who pour hundreds of hours into complex financial models and technical analyses, it still captures the subjectivity with which the standard is sometimes perceived. Yet, despite the difficulty of applying the arm’s length standard, robust concepts, methodologies and analytical processes have been established to make pricing analyses reliable and practicable. After all, today’s transfer pricing community now has nearly 100 years of practice.
Recently, however, there has been a nuanced change to the landscape that affects multinationals of every size. Tax authorities and statutory auditors are shifting focus away from technical valuations towards the overall governance of the transfer pricing function. Rather than focusing on technical transfer pricing positions, examiners and auditors are now paying closer attention to the way in which transfer pricing is functionally organized within the multinational group, as well as on the risk mitigation processes, procedures and controls surrounding transfer pricing.
The result of this shift is that today’s tax and transfer pricing directors are being evaluated not just on the underlying accuracy of their tax positions / economic analyses, but on the overall governance of the function. This makes it imperative to demonstrate to examiners or auditors not only the technical foundation of the underlying tax positions, but proper governance as well.
To prepare our clients, Grant Thornton LLP developed a service model that is both a roadmap and a checklist relating to best practice transfer pricing governance processes and procedures. The model (outlined below) covers five periods (representing the annual transfer pricing compliance cycle): budgeting, interim monitoring / maintenance, year-end testing, documentation, and post-filing defense.
These practices underpin an approach that has won Grant Thornton’s transfer pricing group the International Tax Review’s Transfer Pricing Advisory Firm of the Year (Canada) award in 2018—and can help you take your transfer pricing function beyond the pricing. To find out how, contact one of our advisors.
Contact a Grant Thornton Transfer Pricing Advisor for more information.