Taxpayers are reporting an increasing demand for advisers with specialist knowledge as they witness their transfer pricing operations departing from the accepted norms of tax authorities.
“We are facing a dramatic challenge, due to the fast moving new automotive market scenario, in introducing new economic analysis in order to overcome the old TP approach based on the simplified criteria that, if you are a contract manufacturer you are obliged to use cost plus, while if you are a distributor you are obliged to use [resale minus] RM or [transactional net margin method] TNNM,” said Andrea Bonzano, head of tax for Fiat.
Bonzano said methods that are more suitable for the transactions his company has undertaken are not necessarily recognised by the authorities.
“What we see is that many tax authorities and some other automotive companies are still satisfied by the old scenario - it fits with their goal - and not interested in introducing any change,” Bonzano said.
Alexander Kolbl is the European tax director for General Dynamics, which manufactures defence equipment for governments. He said this presents very specific transfer pricing issues.
“Governments usually want to contract directly with the company producing the goods. Thus, we do not usually have a long supply chain flow like in other high value industries. Defence is exempted from open tender requirements applicable to most industries. Thus, in-country production, by either third parties or local subsidiaries or PEs, are more the rule than the exception.”
Kolbl said most defence contractors are more an agglomerate of independent companies and/or business units, who have the liberty to procure from third or related parties, and choose their own enterprise resource planning system, rather than a fully integrated MNE.
“In defence, intercompany transactions happen mostly when a company needs to acquire another good from another company to meet customer specifications or local production requirements; when a related local prime contractor or PE enters the tender, with some parts manufactured in the home country; or for management fees and cash pooling,” said Kolbl.
Perhaps on the other side of the coin, Paul Morton is head of tax for Reed Elsevier, which has a strong focus on digital publishing, with intangible assets taking centre stage.
“From a transfer pricing perspective this means that we are particularly focussed on transfer pricing aspects of intangibles and the work currently underway on the digital economy at the OECD and the European Commission,” said Morton. “Our documentation and our approach generally needs to reflect current thinking in these areas. Our businesses are very global so we have to approach transfer pricing in a consistent way throughout the globe. This means that both we and advisers need to have one eye on local requirements and the other on consistency.”
Morton admitted it is a constant challenge, however, to keep up with developments in transfer pricing practice and industry.
“As digital businesses continue to develop fast only the nimbler of the professional advisory firms are keeping up with changing business models and international tax law and practice. It is challenging for all of us.”
