Tax Authorities Demand More Transfer Pricing Documentation From Companies, as Governments Seek Additional Revenue

November 11, 2009 10:39 AM EST

NEW YORK, Nov. 11 /PRNewswire/ -- Many transfer pricing systems are coming under unprecedented stress as companies and revenue authorities around the world reassess their economic expectations in the current environment and plan for a global recovery, a new report from KPMG's Global Transfer Pricing Services group concludes.

Tax authorities -- under pressure to provide revenue to their governments -- are demanding additional documentation from formerly profitable companies that are now incurring losses and, therefore, paying less tax, KPMG partners and professionals indicate in the report, "Planning for the Recovery - Examining Transfer Pricing in the Current Environment and Beyond."

"The economic events of 2008 and 2009 have dramatically tested the entire transfer pricing system--a system that has been developed over a period of increasing globalization and prosperity," said Steven Fortier, global leader of KPMG's Global Transfer Pricing Services group and principal with KPMG LLP, the U.S.-based audit, tax and advisory firm.

"Multinational companies now need to adjust rapidly to new, much more difficult conditions and take a careful look at guidance from tax authorities, as well as their own current practices, in order to redraw transfer pricing policies in the new and different economic environment," he added.

Further, Fortier said that to meet increasingly stringent tax authority requirements, corporate taxpayers will need to find new ways to demonstrate that prices charged for inter-group transactions are appropriate.

The report, which addresses some of the critical transfer pricing issues that companies and their tax departments will continue to face in the coming years, is based on research and insights from leading KPMG transfer pricing professionals around the world.

Benchmarks Difficult to Find

According to the KPMG research report, a key challenge during the transfer pricing audit process has been the lack of comparable transactions to act as benchmarks for intra-group commerce, as economic activity around the world has slowed.

"The problem has been felt acutely in the area of third-party benchmarks," said Fortier. "For example, there is a lag in the availability of publicly available financial data, meaning that the full impact of the recession on company profitability is difficult to assess contemporaneously," he explained. "Furthermore, certain companies that may have been used historically as benchmarks may have been acquired or gone bankrupt during the recession, which would reduce the pool of benchmarks and potentially lead to 'survivor bias' in the financial results."

APAs Under Pressure

Advanced pricing agreements (APAs), often considered clear solutions to transfer pricing issues, have also come under strain, the report concluded. APAs are binding contractual agreements, the terms of which are fixed while the agreement is in force. This means that companies wanting to change agreements because of market changes, falling prices, or revenue losses, may find it difficult to adjust or terminate APAs that no longer match business realities.

"Taxpayers should expect an aggressive approach to their transfer pricing if they do not comply with an executed APA," Fortier said. "That said, understanding the relevant tax authority's views on APAs is important for companies in, or expecting to enter, an APA in the current environment."

The full report, prepared to meet the needs of tax and corporate finance executives, is available at: http://www.kpmg.com/Global/IssuesAndInsights/ArticlesAndPublications/Pages/Planning-for-the-recovery.aspx.

Articles in the report deal with such issues as: the implications of the economic downtown and recovery for common inter-company structures, the defense of transfer pricing arrangements in the recession, and the ability of taxpayers to mitigate issues with existing advance pricing arrangements.

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International's member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.

    Contact:
    Robert Nihen/Ichiro Kawasaki
    KPMG LLP
    201-307-8296/8640

SOURCE KPMG LLP

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