Tax authorities seeking to enforce transfer pricing regulations are considering a broader range of company transactions that could result in more detailed investigations, KPMG has warned.
A new report from the professional services company highlights a number of 'red flags' now seen by tax bodies worldwide as possible reasons for further inquiries. They include:
- Unusually high profits or losses in a group company.
- Corporate restructurings involving closures or reductions in operations.
- Significant inter-company management fees.
- Dealings with a group company in a tax haven.
- Location in a low cost country.
The KPMG International publication — entitled A Meeting of Minds - Resolving Transfer Pricing Controversies — emphasises that major firms should take a systematic approach to setting and documenting inter-company transactions, identifying transactions that may attract a tax authority's interest, preparing the necessary documentation (including a thorough transfer pricing policy document) and deciding what their objectives might be.
KPMG UK partner Andrew Hickman commented: 'Companies operating internationally are discovering that their transfer pricing positions may face challenges from one tax authority, even when that position is well-supported and accepted by other tax authorities operating under the umbrella of the OECD guidelines'.
Mr Hickman's colleague John Neighbour added: 'A company's priority might be to limit conflicts with tax authorities, to improve predictability in financial statements, to manage the effective tax rate, or to meet cash flow targets.
'The company will likely try to balance a number of these objectives. The important thing is to have a clear and well-supported rationale for the decisions that are made.'
