Global tax reform, ineffective use of technology and economic uncertainty are putting significant strain on business’ transfer pricing (TP) capabilities.
TP is a critical tax function for organisations that oversees internal corporate transactions including cross-border payments between subsidiaries, property leases and (IP) licenses.
But those who responded to the latest EY International Tax and Transfer Pricing Survey said they expect that we are now entering a period of effective tax rate instability, driven by factors including shifting supply chains, global tax reform and inflation.
The survey of 1,000 TP professionals and stakeholders in 47 jurisdictions found that eight in ten face a “moderate” or “significant” risk of double taxation as a result of global tax reform and seven in ten say that global minimum taxes will have a “moderate” or “significant” impact on their transfer pricing policies. Demand for advanced certainty on TP positions doubles.
Tracee Fultz, EY’s Global Transfer Pricing Leader, feels that the complexities around implementing global tax reform continues to take its toll on tax departments.
“With the heightened risk of double taxation, getting certainty is at a premium.,” she said. “This requires a fundamental pivot from tax planning to building as much certainty as possible into transfer pricing positions, which means being as proactive as possible in dealing with anticipated and current controversies.”
The survey also found that the cascade of outside pressures impacting broader business decisions are complicating TP leaders’ roles. Of those surveyed, 77 per cent said inflation will have a “moderate” or “significant” impact on their transfer pricing policy over the next three years, while 51% say higher interest rates have impacted their medium and long-term inter-company debt pricing.
As organisations adjust their operational strategies to deal with supply chain risk and meet their climate ambitions, tax departments will also need to adjust transfer pricing approach to align with evolving business goals
Changes in supply chains and commitments to ESG objectives add further challenges. Twenty-eight percent have already changed their transfer pricing policy to account for ESG policy, while 42 per cent say their organisations have relocated production from one jurisdiction to another in the last three years because of geopolitical issues.
More than six in ten (62%) anticipate changes to supply chains having a “moderate” or “significant” impact on their TP policy in the coming three years as well.
Fultz says: “As organisations adjust their operational strategies to deal with supply chain risk and meet their climate ambitions, tax departments will also need to adjust transfer pricing approach to align with evolving business goals. A clear roadmap for standardising tax and transfer pricing data is needed so that it can be efficiently accessed and analysed to help businesses better react to these challenges.”
Interestingly, given that it is now 2024, 75 per cent of respondents said that ineffective use of technology was their first or second biggest challenge, while 67 per cent ranked “poor data quality” as their first or second biggest challenge.
Marna Ricker, EY Global Vice Chair – Tax, said: “Companies now face many new and extremely complex tax reporting requirements globally and more on the horizon. Many of these requirements include taxation at source as a transaction occurs.
“New and emerging technologies including GenAI, robotic automation and quantum computing will be key in helping tax professionals meet these demands. Yet, currently, many are in the very early stages of learning how to use and deploy such technologies.”