Transfer price savings face greater scrutiny

Transfer price savings have become a greater source of risk for private equity firms as tax authorities signal a crack down on those who unjustifiably shift profits into low or no-tax jurisdictions.

In its latest global private equity report, law firm Baker & McKenzie argued that firms should take a more “holistic approach” to transfer pricing (when one division of a parent entity sells/buys to a sister entity) instead of evaluating individual transactions on their own merits.

“Although each individual transaction may well have been benchmarked and appropriately documented as being an accordance with the arm’s length principle, we are seeing a clear trend for certain companies to come under scrutiny in relation to the overall impact of their transfer pricing arrangements,” the report said.

Baker warned that if for instance all transactions taken together resulted in no or little tax being paid to a particular country, that tax authorities may be more prone to challenge the cumulative effect of their transfer pricing. 

Ropes and Gray tax partner John Baldry said GPs should be careful to document their transfer pricing decisions. “You need to show tax authorities that you are consistent and have seriously thought about what that pricing ought to be.”

The message from tax experts comes after increasing pressure on tax authorities to provide coordinated legislation against tax avoidance. The Organisation for Economic Co-operation and Development (OECD) recently issued a paper arguing that steps should be taken to ensure tax systems do not unfairly favor multinational corporations. 

Dechert tax partner, David Gubbay, added that the impetus would need to come from a body like the OECD before individual jurisdictions make any changes to current transfer pricing legislation.