Transfer pricing in the post-beps age The challenge to convert mere compliance into good governance

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1 Transfer pricing in the post-beps age The challenge to convert mere compliance into good governance Transfer Pricing Compliance versus Transfer Pricing Governance Are Transfer Pricing Compliance and Transfer Pricing Governance just different names for the same thing? Or are they in fact different things with a common denominator: transfer pricing? This article is based on some interesting interactions with CFOs and heads of tax of multinationals on compliance and governance issues relating to transfer pricing. Especially the pursued level of compliance triggered us to put some thoughts on paper. We welcome all feedback and would be grateful for your remarks or questions on the subject. Statement 1: Being compliant is not the same as being in control. Compliance usually focuses on formalities, such as meeting deadlines and making sure to have available all regulatory required documents. It often involves looking back and register what has happened, like testing of actual results on what may be considered to be at arm s length. Compliance thus generates lots of paper output in the form of the legally required transfer pricing documentation. Being compliant therefore may provide some comfort that you have fulfilled all formal requirements, but it does not necessarily mean that you have actually managed the material transfer pricing exposures within a company. Having documents available will not in itself result in content that actually clarifies, supports and justifies the transfer pricing policies applied. Only if the documents that are created establish a proper and consistent picture of a company s transfer pricing practice will they be able to contribute to a material comfort level in respect of transfer pricing exposures. Good Transfer Pricing Governance builds around a well-defined strategy and related business, finance and tax controls. Such governance defines the targets and boundaries of an organization, and determines how an organization should operate and behave. Whereas compliance is often about looking back, governance is about looking forward. Only when both are combined and aligned, you are in control. Statement 2: The chosen level of transfer pricing compliance should be aligned with and embedded in a company s transfer pricing governance policy which should be determined by the board. BEPS has led to a significant increase of the compliance burden of international operating companies. Meeting all formal compliance conditions may be a substantial challenge for companies. The challenge in the post-beps age will be how to embed the level of compliance in the governance aspirations of multinationals. When compliance is considered as a part of the bigger governance challenge of companies, it may be that rational choices need to be made and priorities need to be set to establish the best possible governance model within the current state of a company s operations. It might be rational to opt for less formal compliance in favour of more material

2 compliance when the risk exposures are taken into account. Given the potential impact on the company it is evident that decisions in this respect should be made by the board. Compliance, governance and tax audits As a consequence of the BEPS action plans, formal tax compliance seems to be the current focal point of many tax departments. This is specifically true for transfer pricing compliance due to the introduction of mandatory transfer pricing documentation including master file, local file and country-by-country reporting. However, the real challenge in the post-beps era seems to be how to manage the compliance burden and at the same time work on and within the TP Governance and related control framework. An interesting initiative in preparing for a tax audit is the International Compliance Assurance Programme (ICAP) that started this year 1. ICAP is intended to develop a coordinated approach for tax authorities and to provide multinationals with a transparent assessment of the risks. The approach of the tax authorities taken in their assessment of transfer pricing risks can be seen as an illustration of the above challenge. In this approach, there is a high interest in the group's tax control framework (or equivalent documentation), including how this is applied in practice to align the group's tax outcomes with the desired risk profile and its broader corporate tax strategy, and to mitigate any tax risks,.. The ICAP list contains amongst others: TP documents (Master File, Local File, CbCr and related documents) general description of the global value chain of an MNE group's tax reporting and IT systems high-level summary of how tax data is captured and analysed business restructurings (undertaken or proposed) group's external funding position and how the group's financing is managed. TP Governance and Compliance, pieces of one puzzle! In the post-beps age, proper alignment of transfer pricing compliance activities with a multinational s governance policy is key to be able to meet the requirements of all stakeholders and to be prepared for discussions with local tax authorities. 1 Source: OECD. The initial focus is set on transfer pricing and permanent establishments (including allocation of results).tax administrations from eight jurisdictions are participating in ICAP (Australia, Canada, Italy, Japan, the Netherlands, Spain, the United Kingdom and the United States.

3 The connection between governance and compliance can be described as follows: How to work on transfer pricing governance and compliance There is no one size fits all, but there are some basic questions that could be a starting point for building and testing your TP governance and controls. I have listed some below: Do you have a formalized tax strategy and aligned roles/responsibilities on central and decentral level? Is there sufficient awareness of the importance of TP within the organisation? Do you (regularly) perform scans on the TP aspects of your business (in-house/third party specialist)? Do you have (access to) sufficient knowledge on local TP aspects? Do you have a clear policy on how to deal with tax audits? Do you have a clear positioning of the tax function within your company and policies in place to safeguard early stage identification of relevant events? Is your TCF embedded in the business control framework and actual controls (audits, internal controls, audits, monitoring and financial reporting)? Do you have clear procedures in respect of sharing of information and communication internally (up to board level) as well as externally?

4 The levers of control 2 or the COSO framework are often used as control frameworks for Governance. The levers of control of an organisation COSO framework 2 Simons

5 Quantera Global - Our view and approach In our daily practice we try to support our (potential) customers in deciding what the optimal approach is in meeting with the challenges of transfer pricing in post-beps times. The answer can range from nothing to a complete redesign of the client s strategic risk management. Obviously, we can very effectively support our clients in their compliance requirements, from documentation and benchmarks up to software solutions for future years, that will limit time spent on updating standard reports. However, we believe that our real added value is in supporting you in the right analyses of your level of compliance and the sustainability of your transfer pricing policy. Therefore our advice is to start with an analyses, which will lead to a far better understanding of the level of compliance needed and a far more efficient process. Our approach can be described as follows: 1. Pre-design stage: we will identify your needs and requirements and determine the context 2. Concept development: this is the fact-gathering stage, in which we analyse the facts and circumstances 3. Design options: in this stage, we will determine the possible solutions and analyse opportunities and potential risks 4. Design synthesis: in this stage, we will in cooperation with the client select the best solution, work out the opportunities and mitigate potential risks 5. Design completion: in this stage, the transfer pricing policy will be implemented and tested and any necessary documentation will be completed. Governance is key as multinationals need to be able to adopt quickly to changes in their industry and markets. Having adequate TP governance in place will minimize potential impacts on your organization and can identify future opportunities. Theo Elshof & Richard Slimmen Managing Directors Quantera Global

6 Being compliant is not the same as being in control Are your really ready for a transfer pricing audit? Are you in control? Transfer Pricing Compliance and Transfer Pricing Governance are often seen as one and the same thing. But what if they are in fact different things with a common denominator: transfer pricing? Prior to the BEPS age, organisations saw transfer pricing as just a tax compliance issue. The post-beps age has taught us that transfer pricing requires more than compliance alone. It requires strategy and transfer pricing governance with the aim of becoming in control. It has become a business issue that requires organizations to be more pro-active than they used to and, eventually, implement a well-defined policy and governance within the entire organisation. What is the difference between transfer pricing compliance and transfer pricing governance? Which aspects are important in relation to good governance? Quantera Global is able to assist you with the design, analysis, assessment and implementation of a transfer pricing policy as well as transfer pricing governance. We can help you be in control. Curious what we can do for you? Please read our full article here or contact us directly.