More than half of multinational enterprises have seen a moderate or significant increase in transfer pricing scrutiny from tax authorities, a new report has claimed.
The statistic is based on research from Finnish TP tech provider Aibidia, who surveyed over 100 in-house and advisory professionals, as well as academics, regulators and other TP specialists.
Most (65%) respondents were in-house tax and TP leaders, representing companies with revenues ranging from under $100 million to more than $10 billion. Advisory professionals made up 28% of respondents.
Almost all (90%) of those surveyed were based in Europe, with 7% from the Americas and 3% from Asia.
According to the report, 36% of companies indicated a “moderate” increase in TP scrutiny from tax authorities, while 17% saw a “significant increase”.
Aibidia said that the significant increases in scrutiny were more prevalent among the largest companies.
“All the declining economic circumstances seen internationally since the war started in Ukraine have led to governments being stricter and more active in their audits due to the government’s need for additional economic resources,” Brigitte Baumgartner Garcia, TP professional and co-head of Aibidia’s compliance product, tells ITR.
Aibidia also found that 7% of companies were dedicating over 500 hours, and 2% were spending more than $2 million per year, on audit responses.
Emphasising this increased TP scrutiny, the report also found that over two-thirds of companies (67%) are preparing local files in advance for all required countries and entities.
Meanwhile, 29% of respondents are creating local files for “high risk and value countries and entities”, with only 4% claiming they prepare local files on an ad-hoc basis.
The heightened preparation by companies reflects a trend towards mandatory file submissions with financial penalties for non-compliance, Garcia says.
“More countries, like Denmark and several countries in Latin America, are moving towards mandatory submissions. For tax administrations that want to increase their oversight, it’s the natural next step,” she notes.
Pia Honkala, co-head of Aibidia’s operational TP product, tells ITR that corporates can sometimes undervalue compliance.
“Even though some experienced tax people within companies like to purchase TP compliance services, it’s still seen internally as a cost,” she argues.
“But while you can simply manage risk through compliance, it can also help a company’s strategic financial planning by better understanding its risk profile,” Honkala adds.
Pillar two projections
The report also assessed the anticipated impact of the OECD’s pillar two project, from both an in-house and private practice perspective.
Pillar two aims to ensure that multinationals with revenues of at least €750 million ($810.87 million) pay an international minimum effective tax rate of 15% in all countries in which they operate.
Almost half (45%) of surveyed multinationals expected to make either “moderate adjustments” or a “significant overhaul”, while 24% said they were uncertain about the potential impact of pillar two.
“The attitude from some companies towards pillar two has been ‘let’s wait, it’s just soft law’”, Garcia says.
“But if a company isn’t looking at pillar two right now, then that’s a huge issue. It’s a red flag,” she adds.
The report revealed that most (68%) advisory firms are offering pillar two support to clients, to varying degrees.
According to the survey, 32% are “providing targeted advice on specific issues”, 28% are “offering comprehensive compliance services”, while 12% are “referring clients to external specialists or suggesting technologies”.
The Aibidia research follows recent suggestions that both pillar two and new TP rules may lead to increased complexity for both companies and advisers.
ITR reported in February on senior US economist Alan Cole claiming that pillar two has a “crack in its foundation” and may facilitate the problems it was designed to address.
Also in February, ITR quoted a host of US TP experts who argued that the OECD’s recent amount B guidance, designed to streamline TP rules, fails to provide simplicity and may in fact increase uncertainty.
