The Big 4 and other smaller international accountancy and law firms are keen to promote the diverse industry experience their advisers possess but it remains to be seen whether taxpayers feel they are getting the level of service they expect.
Diverse industry experience is clearly important to taxpayers when employing external advisers.
While the fundamental principles of TP remain the same, certain industries place more emphasis on intangible assets, or how the laws interact with other regulatory frameworks.
For instance, one TP director at a multinational bank said the TP aspects of financial services primarily revolve around the OECD attribution of profits to permanent establishment (PE) report, which is not as relevant for other industries.
“TP in financial services has many inter-linkages and dependencies with the banking regulatory frameworks, which are themselves constantly evolving,” said the banking TP director. “Finally, financial products can be complex and it will be difficult for non-financial services TP advisers to quickly understand and analyse TP in financial services.”
Annie Han, who manages TP at Siemens in China said the software part of their company, and the digital/numerical control part, creates TP issues that need more industry experience.
However, she does not think that diversity of external industry experience is as important for her industry, simply because Siemens operates across a number of industries, other than software.
“Siemens covers many industries but we generally follow a unified TP guideline. It works well generally despite the fact that different industries do have specific issues. This does not pose a big issue in most of the cases,” said Han.
International demand
Demand for external advisers with TP industry experience differs from jurisdiction to jurisdiction.
In Asia, for instance, where TP regimes are not as well developed, the need and supply of industry experience from external advisers is less.
“Non-OECD emerging Asia is very different from practicing TP in the developed countries in the OECD,” said the banking TP director. “Not only are OECD TP concepts interpreted and applied differently, even basic assumptions such as taxpayer’s rights and approach towards dispute resolution can vary vastly. Hence, local knowledge and experience is critical for effective advice.”
However, some jurisdictions, such as India and China, are beginning to focus in on certain industries where intangible assets in particular can create issues that could warrant higher tax payments from companies.
“In China, for example, tax authorities are especially concerned about the marketing intangibles or market premium in luxury product industry and automobile industry,” said Han. “Another focus of the tax authorities might be the contract R&D activities conducted by the local software companies. So yes, industry experience is crucial from external advisers for those specific industries.”
The legal system may also impact the level of advice required.
“In some jurisdictions, like for example, the US, India, China, Japan, Israel, etcetera, because of complexities in law, the need of industry experience becomes more apparent,” said Jitendra Grover, head of tax for Aricent.
How the external advisers are developing their services
Advisers are noticing the changes in their service demands, for instance, more clients have the capacity to prepare their own documentation.
“In the mid-2000s, we began to take stock of the Canadian transfer pricing market to determine how it would evolve over the next five to 10 years,” said Greg Noble of Ernst & Young’s Vancouver practice. “Based on the experience in other regimes, such as the US, which had transfer pricing documentation for approximately 10 years at that point, we determined that an active growth strategy would be necessary to maintain our market leading position over the mid to long range future.”
“We anticipated that routine transfer pricing documentation work would become commoditised and would not serve to provide growth for our practice or our people. As such, we held extensive planning sessions to determine the strategic direction of the Ernst & Young Canadian transfer pricing group,” Noble added.
Due to Canada’s geographical size and scope of industry, the firm decided to create a hub model where, for instance, Toronto would act as the financial services specialist, though other industry specialists would be trained in the practice with a presence in other regional offices.
“This would allow for economies of scale, yet also allow for regional adaptation and the ability to make local relationships with clients and other Ernst & Young tax professionals in the local markets,” said Noble.
In response to more cost-efficient requests for TP assistance from clients, the Canadian practice located the more routine TP requirements, such as annual update searches, to Bangalore, India, where specialised economists are more cost effective.
Choosing the right adviser
When taxpayers find themselves in particularly tricky situations, where industry experience becomes crucial they say it becomes apparent whether the firm they are dealing with has the necessary skills or not.
“Often there is no substitute for having real in-house exposure to be able to relate to clients when it comes to designing TP that is practical for a client to implement,” said the banking TP director. “Such conversations involve talking through systems, data and accounting challenges; way beyond just TP technical concepts. The best advisers will have teams with former in-house experienced members on their teams.”
External advisory firms are marketing their diversity more than ever but the proof is in the pudding when it comes to how these firms work practically with their clients.
“A tax expert who does not focus on industry specifics would typically write a more technical tax advice and one would have to spend a great amount of time in discussing and getting his advice attuned to a specific business situation,” said Grover.
“On the other hand, the adviser with knowledge and familiarity with the industry and its prevalent business model would write more on how tax laws would apply to a specific business situation. It is obvious whose advice would be sharper and more reliable,” he added.
