The Base Erosion and Profit Shifting (BEPS) project, put in place by the Organisation for Economic Co-operation and Development (OECD), has led to significant changes in the international tax landscape. One area that has been most affected by BEPS is transfer pricing, which refers to the pricing of transactions between related parties, such as subsidiaries of a multinational company.
In this article, we will discuss the impact of BEPS on transfer pricing and the key implications for transfer pricing services.
BEPS and Transfer Pricing: A Brief Overview
Transfer pricing has long been a contentious issue in international tax, with many companies using it as a means to shift profits from high-tax jurisdictions to low-tax jurisdictions. BEPS was initiated to address this issue and has resulted in significant changes in the way that transfer pricing is approached.
One of the key aims of the BEPS project was to ensure that transfer pricing reflects the economic substance of the transactions being priced. This means that transfer pricing should be based on the actual functions performed, assets used, and risks assumed by the parties involved in the transaction.
Implications for transfer pricing services
The changes brought about by BEPS have significant implications for transfer pricing services, particularly for multinational companies that operate across multiple jurisdictions.
Here are some key implications to consider:
Increased documentation requirements
One of the key changes introduced by BEPS is the increased documentation requirements for transfer pricing. Multinational companies are now required to provide more detailed information on their transfer pricing policies and how they arrived at the prices used in their related party transactions. Companies providing transfer pricing services will need to adapt to provide more comprehensive and detailed documentation to ensure compliance with the new regulations.
Greater scrutiny from tax authorities
As a result of the increased documentation requirements, tax authorities now have more information at their disposal to scrutinise transfer pricing practices. This means that transfer pricing services will need to ensure that their clients’ transfer pricing policies are robust and defensible and that they can withstand scrutiny from tax authorities.
Focus on value creation
Another key implication of BEPS is the increased focus on value creation. Under the new rules, transfer pricing should reflect the value created by each party to a transaction. Organisations will need to take a more holistic approach to transfer pricing and consider factors such as intangible assets and intellectual property in their pricing calculations.
BEPS has also introduced greater transparency into transfer pricing, with multinational companies required to disclose more information on their transfer pricing policies and practices. Businesses or organisations will need to be more transparent in their approach, and ensure that their clients are fully aware of the implications of their transfer pricing policies.
For instance, Singapore has introduced country-by-country reporting requirements for multinational companies, which require them to provide information on their global operations and profits on a country-by-country basis. This information is then shared between tax authorities in different countries to facilitate greater transparency and prevent profit shifting.
Finally, the changes brought about by BEPS mean that transfer pricing services will need to take a more proactive approach to risk management. This means identifying potential risks and ensuring that their clients’ transfer pricing policies are structured to minimise these risks.
The BEPS project has had a significant impact on transfer pricing, with many changes introduced to ensure that transfer pricing reflects the economic substance of related party transactions. Transfer pricing services will need to adapt to these changes and take a more holistic and proactive approach to transfer pricing to ensure compliance with the new regulations. By doing so, they can help their clients to navigate the complex international tax landscape and minimise the risk of non-compliance.
Max Lewis provides various services ranging from international tax planning to GST Assisted Self-Help Kit. We received the Best Transfer Pricing Consultancy Firm of the Year at Corporate LiveWire Global Awards and the Best Transfer Pricing Advisory Specialists – Singapore award at APAC Insider Southeast Asia Business Awards 2022. Our exceptional business performance, coupled with remarkable results, is proven through these awards. Do not hesitate to reach out to us today for more information about our various services.
*The above represents our opinions and views and does not necessarily reflect the position of any entities mentioned.