Insuring transfer pricing risk - Nailing the jelly to the wall

Audits of intercompany transactions are increasingly becoming a major headache for multinational groups, with recent settled cases serving to emphasise the scale of transfer pricing liabilities, often running to billions. It is no surprise that TP is now a focal point right up to board level, and we are seeing CEOs, General Counsel and Finance Directors heavily involved in a technicalarea which was once solely the remit of tax departments.

The potential for tax authorities worldwide to generate significant cash from TP audits is resulting in their adopting ever more bullish attitudes. TP liabilities remain a major concern for any international group in relation to tax provisioning and audit management, but we are also seeing a major focus on transfer pricing within deal environments, supported by a raft of legislation, formal guidelines and commentary that emphasise the need for detailed transfer pricing analysis of group reorganisations, both before and after corporate disposals and acquisitions. In worst case scenarios, a transaction may even result in a company being subject to transfer pricing scrutiny where there previously may never have been a material issue. In such instances, cash at risk is not merely a matter of amended TP liabilities, but increases significantly with draconian penalties for non-compliance that in certain territories can double the settlement required.

A common misconception is that TP adjustments at audit generally ‘wash out’ in the accounts of a multinational, with a change in profits in one jurisdiction being matched by a corresponding adjustment in the counterparty jurisdiction(s), and the net cash cost to the group being relatively insignificant. In practice this is simply not the case. Initiatives in numerous jurisdictions now target group tax planning and internal transactions with so called ‘tax havens’, and anecdotal evidence suggests that this is not only a very lucrative source for successful TP audits, but also curries favour with public bodies and voters alike. Such TP adjustments at audit are now routinely being made between group companies with significantly different corporate tax rates, frequently reducing profits being attributed to the ‘tax haven’ and resulting in large irrecoverable tax costs.

Our significant technical knowledge and experience across the globe is key to providing seamless advice in relation to operational and transactional TP risk, and this, combined with practical advice that is reactive to the variations inherent in any given multinational business, allows us to provide a truly unique service to the insurance market.