Countries around the world, including the U.S., are scrambling to deliver an unprecedented number of financial support programs — from loans, grants and tax deferments to stimulus payments — in an attempt to help keep businesses, citizens and the economy at large afloat through the Covid-19 crisis.
The U.S. government in particular has reserved more than $2 trillion in relief aid as part of the CARES (Coronavirus Aid, Relief and Economic Security) Act. With economic impact payments to American citizens reaching $267 billion so far, an additional $600 per week in unemployment benefits, and the Paycheck Protection Program (PPP) authorized to shell out up to $349 billion to small businesses for employee furloughs and other expenses, the strain on the government’s balance sheets has been enormous. And there’s no clear end in sight. The need for additional economic assistance from state and federal governments is likely to continue until we have a vaccine or broadly effective treatment for Covid-19.
In the months and years to come, both businesses and governments will most certainly aim to recoup at least a portion of their losses. The result could be a “tug of war,” with governments raising corporate taxes or placing them under a finer microscope — all of which will undoubtedly keep transfer pricing under the glare of global revenue and tax authorities.
Transfer Pricing: Why It Deserves Revisiting Now
What is transfer pricing? It’s an accounting practice that allows for the trading of goods, services and intellectual property between business subsidiaries — for example, the buying and selling of parts between an automobile manufacturer’s divisions or the licensing of patents or software from one business unit to another. This practice takes on additional importance when transactions relate to cross-border (international) activity.
Prices are usually set based on the going market rate for the good or service. But the potential for misuse exists if a company charges above or below the market price and transfers profits and costs to other divisions to reduce their tax burden.
To prevent this very scenario, revenue authorities have acceptable methods regarding transfer pricing, but even so, the global landscape is littered with multinationals that have been investigated or fined for dubious transfer pricing practices.
Amid the Covid-19 pandemic, as companies come under immense stakeholder pressure to drive profits — and the government, the IRS and tax authorities in other countries become even more scrutinous about ensuring corporations are paying the taxes owed in each jurisdiction — now is the time for businesses to conduct a thorough review of their processes to ensure effective monitoring and oversight of transfer pricing policies.
Three Transfer Pricing Essentials
To ensure compliance and consistency across the entire organization — and avoid the headaches of audits or hefty fines — here are three transfer pricing guidelines to consider applying now:
1. Break The Cycle Of Manual Reporting
Although it may seem surprising, it’s still all too common for companies to manage the complex process of transfer pricing through a series of static spreadsheets. Unfortunately, this approach is onerous, highly prone to error and difficult to apply uniformly. It’s an intensely manual process, working with large volumes of data, and as such tends to happen once a year, at the end of the year.
With such infrequent monitoring, organizations run the risk of late material adjustments to their accounts, which infuriates internal stakeholders and is a red flag to the company’s auditors. Moving toward an automated system of data collection and collation ensures consistency across divisions and subsidiaries, enables more frequent monitoring and provides the visibility and clarity required to satisfy audits and ensure organizations are able to easily defend their transfer pricing policies.
2. Prioritize Policy Over Numbers
Before drilling down and poring over the details of whether calculations and adjustments between internal business entities are accurate, take a step back and focus on the big picture. Are your transfer pricing policies solid? Are they supported by the right documentation? Does the profit distribution across the company look right when viewed through an auditor’s eye, or does it need to be adjusted?
Again, be sure you are setting your organization up to operate from a place of financial intelligence by connecting transfer pricing strategy and policy with execution, so you can collect and organize your data quickly, look for ways you can increase your profitability, and make adjustments as needed.
3. Weigh The Benefits Of Data Scientists
The IRS and other tax bodies have models in place to flag potential anomalies when it comes to transfer pricing (and other accounting standards), and data scientists can play an important role here. If government bodies have questions or require more information — or if you find yourself in the unenviable position of being audited — data scientists possess the analytical skills and expertise that will make it much easier to ensure you provide not only the right information, but critical context for your data as well.
The Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative is another consideration here. BEPS already requires that companies itemize their revenues by country, and as taxation bodies develop more sophisticated models that compare BEPS data with corporate tax return data, there may be an increase in investigations, again reinforcing the growing need for data scientists.
As we navigate this pandemic in the months — and possibly years — ahead, government intervention, at least to some degree, is likely to remain a part of the corporate reality. With governments looking to recover some of their losses, accounting practices like transfer pricing will inevitably remain under careful examination. By starting with the steps above, companies can ensure calculation accuracy and be confident that their approach to transfer pricing is sound and defensible, thereby minimizing organizational risk.
How Multinationals Can Improve Global Transfer Pricing Forecasts to Address a Changing Global EconomyDownload Now
This article originally appeared in Forbes on August 5, 2020