Beyond the pandemic: Global transfer pricing trends drive change
It is no secret that the world is changing at an accelerated rate. The world of transfer pricing is no exception, explains Oleg Rak of Mason Rak. The practice – like everything else in these unprecedented times – will have to adapt.
International executive search firm Mason Rak has spoken with transfer pricing (TP) leaders across the globe, who expect changes in the world of TP to be accelerated as a result of the novel coronavirus and the resulting economic disturbances across the world.
The virus has made issues other than TP reform emerge at the top of jurisdictions’ to-do lists, one example being the US’s sudden exit from the OECD’s digital taxation negotiations in June 2020. However, sooner or later, the same trends that preoccupied tax authorities and professionals will come back onto the agenda. Thus, in concern of the US and the global digital tax work, Pascal Saint-Amans, the head of the OECD’s Centre for Tax Policy and Administration, has mentioned that he expects the US to return to the discussions once its contentious election season is over.
In other words, seismic change to the architecture of the global TP system is still on the way. In the last few months, TP professionals have leveraged their expertise to capitalise on TP market prospects for upside career potential, making change work for them, rather than always reacting to the latest developments.
What does proactive TP management mean in a context of global uncertainty? One example would be thinking about how the EU’s digital services tax (DST) – due to be introduced in 2021 – will certainly provide opportunities for TP optimisation rather than being just another compliance headache. Tax academic Christine Kim points out that, because the DST is supposed to be levied on gross turnover, it functionally reduces the profit margins of the EU parts of a group, opening the possibility of tax optimisation by moving substance to the right location.
What at first appears to be a compliance challenge can be transformed into an opportunity by the right team with the right skillset. This fact grows in importance when the numerous unilateral changes with TP implications that we have begun to experience in recent years, the UK’s DST being a prime example, are brought into view. As one senior TP leader noted, “The more changes that countries make – that will drive planning in the space. Where there is planning, TP [teams are] along for the ride on that, and more often in the driving seat.”
In executing strategic TP assignments across different global regions, we have observed that proactive TP management means an ability to understand how the financial conditions created by the pandemic will affect the actions of governments in diverse regions differently. Tax authorities in East Asian countries with a better grip on the pandemic are likely to show less patience with corporations, for example, than authorities in jurisdictions where the economic fallout from the pandemic continues to be severe. Some cash-strapped tax authorities may be more predisposed to settle disputes rather than let them drag on. In some cases, like in Brazil, this more dovish stance is attached to a commitment to multilateral change through the adoption of OECD standards.
In the Middle East, meanwhile, analysts at Mason Rak anticipate that the financial pressures of the global economic picture will add further volatility to what is already seen as a fast-changing TP landscape. In the last two years, countries in the region have issued a spate of TP legislation where previously guidance (and disputation) was thin on the ground. Based on our knowledge in the region, an uptick in audit activity and disputes is not a ‘wait-and-see’, but an ‘it’s-happening-already’, accelerated by the fallout from COVID-19. Proactive TP managers foresaw the changes and were ready for them. Other companies will need to quickly on-board personnel to build their TP capacity in the region.
In recent years, there has been increased discussions regarding ‘operational transfer pricing’, a concept that allows companies to monitor and proactively respond to changing TP landscapes in order to solve problems nimbly and enhance process management through technology.
Yet, in our experience, it probably remains true that the best way to face the global TP future is not by reinventing the wheel but by strengthening existing teams and enhancing tools at their disposal. Especially in an era of remote working, communication skills and a proven ability to build confidence and inspire teams will be crucial. In a business environment where companies in all jurisdictions are looking for savings, building trust is harder than ever, according to a TP head at a leading professional services organisation.
As the partner promotion track narrows in the Big Four firms, it is anticipated that some TP talent would be looking for ways to continue to advance in their careers. This gives a big opportunity to ambitious law firms and smaller boutique advisory firms, as well as to multinationals looking for TP leaders who already have all the skills to bring value from the first day.
The truth is that the ideal TP hire does not just bring subject-matter expertise or skills in building and maintaining relationships to the table. The ideal hire brings both.
Mason Rak is a global specialist tax and TP search firm, who operate extensively across all key global markets. The firm executes some of the most challenging strategic TP assignments and acts as a trusted advisor to accountancy and law firms around the world. If you would like to learn more about the global market and strategic TP opportunities, please contact the author.
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