Global Warning: Transfer Pricing Enforcement Heats Up
Finland, that northern hot spot of transfer pricing, is the latest government to announce an increased and concerted effort to exam and enforce its transfer pricing laws. In January 2012, the Finnish tax authority, VERO, announced plans to centralize its transfer pricing activities with the establishment of a 40-person unit to focus on the study, analysis and resolution of transfer pricing cases. The government’s plan is a ribald response to increase tax revenues and comes amid a recent tax report claiming the government failed to collect up to EUR 8 billion in tax revenues over that past five years. It also comes on the heels of other Nordic countries implementing similar programs.
Indeed, governments around the world, from the United Kingdom, to Korea to Kenya are increasing the attention, resources and coordination they employ toward transfer pricing. Korea recently instituted a system to better coordinate its customs and National Tax Service in the examination, enforcement and reconciliation of transfer pricing cases. Accordingly, the Korea Customs Service subsequently announced it was putting some 5,000 multinational companies on a transfer pricing “watch list.”
The United States has instituted its own transfer pricing “super center” with the establishment of its transfer pricing directorate and its Field Practice and Advance Pricing and Mutual Assistance (APMA) offices. The U.S. government announced in 2009 its plans to add 800 new international examiners as part of its effort to raise $210 billion over the next 10 years through increased enforcement and tax reforms.
For governments increasingly strapped for revenues, transfer pricing is a zero sum game—if they don’t grab it first, another country will. Unfortunately, for multinational corporations this can be a lose-lose proposition. Governments on both sides of the transaction are increasingly scrutinizing and potentially assessing the same transaction. This will mean corporations will need to increase their own scrutiny and analysis (and coordination) of their transfer pricing compliance documentation. No longer will “one-sided” home country studies be sufficient; and even combined channel studies will have to take into consideration related “third country” transactions. Comprehensive global documentation, or at least coordinated, global transfer pricing planning, will soon be the new “normal”. Or, alternatively, companies can shortcut the whole process and secure a bilateral (even multi-lateral) Advance Pricing Agreement.
With respect to transfer pricing—it’s time to come in from the cold.