2010 Global Transfer Pricing Survey - Ernst &...

2010 Global Transfer Pricing SurveyAddressing the challenges of globalization

ContentsIntroduction 1Executive summary 2Key trends in global taxation and transfer pricing 5Insights from the survey 7Transfer pricing still dominates the tax agenda 7Companies are paying closer attention to documentation 9The risk of audit is rising ... 11... as the controversy management tool chest is growing 12Transfer pricing rules are in flux 13Restructuring efforts and the pursuit of a more tax-efficient supply chain are becoming more complex 15Conclusion 18

Americas

22 Argentina

23 Brazil

24 Canada

25 Mexico

26 United States

Asia-Pacific

28 Australia

29 China

30 Japan

31 New Zealand

32 South Korea

EMEIA

34 Belgium

35 Denmark

36 Finland

37 France

38 Germany

39 India

40 Ireland

41 Italy

42 Netherlands

43 Norway

44 South Africa

45 Spain

46 Sweden

47 Switzerland

48 United Kingdom

20Country-specific findings from the survey

49Methodology

52Glossary of terms

54Ernst & Young Transfer Pricing country contacts

2010 Global Transfer Pricing Survey1

Introduction

Transfer pricing remains a key tax challenge for the world’s leading companies. That’s the major observation from our latest Ernst & Young survey of tax directors and international tax practitioners.

And with good reason. Faced with a slowly recovering global economy and record deficits, governments are increasingly focused on raising revenues through taxation. As a result, more and more jurisdictions are ramping up their enforcement efforts — not only in developed nations but also in many emerging markets such as China, India, Russia and Brazil.

At the same time, the Organisation for Economic Co-operation and Development (OECD), whose work largely defines the transfer pricing rules adopted by member nations, continues to refine and update its transfer pricing guidelines. In 2010, among other initiatives, the OECD issued a thorough update of its guidance on comparability and profit methods. For 2011, the OECD is shifting its transfer pricing focus to better defining the issues surrounding intangibles such as trademarks, patents and even business models. The OECD will be issuing guidance, hopefully within the next few months, that will form the basis of many governments’ attitudes in dealing with these difficult subjects.

This year also saw the publication of the OECD’s new chapter on business restructurings and its new report on the attribution of profits to permanent establishments. Most global businesses, in the face of mounting pressure to improve profitability, have been undertaking some form of cost reduction or business change program. In many cases, this process includes substantial changes to everything from strategic planning to supply chain. Each and every business change brings with it transfer pricing implications.

Since 1995, Ernst & Young has surveyed multinational enterprises (MNEs) on international tax matters with special emphasis on what continues to be a leading international tax issue — transfer pricing. The ever-increasing scope of our transfer pricing research reflects the growing number of countries that devote attention to transfer pricing. This is noted through increased enforcement and regulatory activity, as well as the increasing variety of transfer pricing issues facing MNEs.

For this survey, we commissioned Consensus Research International to conduct a series of independent interviews of 877 MNEs across 25 countries. The resulting report summarizes the transfer pricing practices, perceptions and audit experiences of a wide range of global corporate tax practitioners. The survey provides insights into how MNEs are dealing with the myriad of economic, regulatory and fiscal changes taking place around the world. For the first time, our survey queries MNEs on their business restructuring activities, an area in which many of our clients express keen interest.

We trust that you will find our 2010 Survey results, together with our insights and recommendations, useful and informative. In our view, there is no question that transfer pricing will remain one of the most important tax issues over the next few years and that tax authorities will continue to increase their focus in this area. Every business needs to be well-prepared for the coming challenges as enforcement efforts will undoubtedly increase significantly.

John Hobster Head of Global Accounts Transfer Pricing

Thomas BorstellGlobal Director Transfer Pricing Services

2Addressing the challenges of globalization

Executive summary

Importance of transfer pricingTransfer pricing is one of the key tax issues today — it is actually more important today than it was two years ago.

Audit experiencesTransfer pricing audits are increasing in significance, intrusiveness and scope.

Controversy managementLitigation remains infrequent — but is on the rise. Meanwhile, the use of and degree of comfort with APAs are increasing — while experience with new arbitration processes remains extremely limited.

Trends in transfer pricing issues and approachesEnforcement actions are placing greater emphasis on intercompany financing transactions and service transactions.

Taxpayer approachesTaxpayers are taking a more coordinated and globalized approach to transfer pricing documentation.

Tax and efficient supply chain managementTax considerations relating to business restructuring are expected to become more important in the coming years.


Importance of transfer pricing Audit experiences Controversy management

Transfer pricing is one of the key tax issues today — it is actually more important today than it was two years ago.

Transfer pricing audits are increasing in significance, intrusiveness and scope.

Litigation remains infrequent — but is on the rise. Meanwhile, the use of and degree of comfort with APAs are increasing — while experience with new arbitration processes remains extremely limited.

• 74% of parent respondents believe that transfer pricing documentation is more important now than it was two years ago.

• 32% of all respondents identify transfer pricing as one of the most important tax challenges facing their group.

• 74% percent of parent respondents and 76% of subsidiary respondents believe that transfer pricing will be “absolutely critical” or “very important” to their organizations over the next two years.

• Two-thirds of respondents have undergone an audit in the 2010 Survey, compared with only 52% in the 2007 Survey.

• 1 in 5 audit adjustments triggered a material penalty, compared with 1 in 25 in 2005.

• Parent respondents report that tax authorities requested access to intercompany agreements and operational personnel in 73% and 41% of examinations, respectively.

• Emerging markets are coming to the forefront of audit activity. The number of parent respondents indicating they had undergone a review in India increased from 6% in 2007 to 11% in 2010, while the number undergoing a review in China increased from 4% to 12%.

• 23% of parent respondents use advance pricing agreements (APAs) as a controversy management tool.

• The level of satisfaction with APAs as a controversy management tool is high: 90% of those who have used them would do so again.

• Only 18% of all respondents have referred a transfer pricing dispute to a competent authority in the last three years.

• The emerging option of binding arbitration has yet to be adopted by a significant number of respondents. Only 2% of all respondents indicate making use of binding arbitration.

• Globally, litigation remains an infrequent but increasing method of dispute resolution, with 10% of all respondents indicating that they have litigated a transfer pricing matter in the last three years, compared to only 3% in the 2007 Survey.

Trends in transfer pricing issues and approaches Tax and efficient supply chain management

Enforcement actions are placing greater emphasis on intercompany financing transactions and service transactions.

Most respondents consider the tax effects of business change on a concurrent basis.

• Reviews of intercompany financing transactions increased dramatically from 7% in 2007 to 42% in 2010.

• Parent respondents indicating that their service transactions had undergone review increased from 55% in 2007 to 66% in 2010.

• Respondents view administrative and management service transactions and intercompany financing as the transactions most susceptible to dispute with tax authorities.

• Moreover, the numbers of respondents holding such views rose substantially. In 2010, 66% of parent respondents say that administrative and management service transactions are susceptible to dispute, up from 54% in 2007. As for intercompany financing, the figure is 63% for 2010, up from 41% in 2007.

• Globally, taxpayers expect to devote more resources to transfer pricing compliance — particularly in China, the United States and India.

• Survey respondents continue to show a preference for transactional methods in establishing transfer prices for tangible goods, services and intercompany financing.

• A majority of respondents indicate that tax implications were considered in the implementation of all categories of business change.

• Cost reduction (78%) and information technology (IT) system implementation/improvement (74%) were the most common forms of business change undergone by respondents in the past four years.

• Restructurings involving intellectual property were the most common forms of restructurings.


Key insights and recommendations

Previous editions of this survey have concluded that taxpayers should be adopting efficient global documentation strategies; devising dispute resolution plans, both preventative and remedial; and embedding tax considerations in business change. This edition re-emphasizes those points, but with some subtle differences:

• ►Audit trends reveal the need for “glocal” documentation. MNEs should tailor their global transfer pricing platform to local requirements in higher-risk, more complex countries.

• ►With audits up and material penalties significantly increased, avoiding disputes will be tougher. MNEs should consider a more proactive approach to controversy management, including appropriately targeted APAs.

• ►Service, intangibles and financing transactions are increasingly in the sights of tax authorities. Our experience is that documentation of these categories of transactions often lags behind documentation for tangible goods transactions. MNEs should develop or enhance their documentation for these transactions.

• ►OECD developments are pushing profit-based methods to the forefront while MNEs continue to rely on transactional methods to determine and document their intercompany pricing policies. MNEs should consider profit-based methods as corroborating or primary methods.

Taxpayer approaches

Taxpayers are taking a more coordinated and globalized approach to transfer pricing documentation, although the number of filers following a contemporaneous approach is slightly down.

• The number of parent respondents preparing their transfer pricing documentation on a concurrent, globally coordinated basis rose to 41%, a significant increase relative to 2007.

• The percentage of parent respondents preparing transfer pricing documentation prior to audit remained stable at 79%.

• The percentage of parent respondents preparing their documentation contemporaneously with the filing of their tax return decreased from 60% in 2007 to 54% in 2010. However, the figure was higher in the United States, Mexico, India and Argentina, where contemporaneous documentation is a technical requirement.

• Preparation of contemporaneous transfer pricing documentation was lowest in Canada, France, Germany, Italy, Japan and Korea. With the exception of Canada, these countries did not have contemporaneous documentation requirements in place during the survey period.

• 69% of parent respondents indicate that upon audit, their transfer pricing documentation was viewed as adequate.

• The majority of parent respondents (58%) continue to use pan-regional comparables.


Key trends in global taxation and transfer pricing

The downturn in the global economy has raised the profile of transfer pricing. Tax authorities are both upgrading and increasing their staffing while at the same time placing greater demands on corporations in areas such as documentation. Meanwhile, the OECD is revising and updating key elements and provisions of its transfer pricing guidance. As a result, companies are finding they must work harder to define and adopt a more proactive stance in defending their transfer pricing policies and practices.

Tax authorities are targeting intercompany transactions in an attempt to protect and increase their tax bases. Since the 2007 Survey, tax authorities in key jurisdictions have taken steps such as significantly increasing their transfer pricing staffing, adopting more centralized approaches to managing transfer pricing enquiries and establishing a more strategic, risk-based approach to prioritizing transfer pricing reviews.

In the United States, the Internal Revenue Service (IRS) added 1,200 employees in 2009 to deal with international issues, with another 800 added through the end of 2010. The IRS has established a goal of achieving a staff of 120 transfer pricing economists, the highest number in its history. As part of its transfer pricing focus, in December 2009 the IRS announced a number of important changes. These include:

• The creation of a Transfer Pricing Practice.

• The establishment of a Transfer Pricing Council to coordinate transfer pricing reviews.

• The establishment of a tiered approach to targeting intercompany transactions based on their potential for abuse.

Transfer pricing has also assumed greater public prominence in the United States as a result of articles in the popular press and Congressional hearings on tax avoidance through “abusive” transfer pricing.

In the United Kingdom, Her Majesty’s Revenue and Customs (HMRC) has made a similar, coordinated transfer pricing push. In June 2008, HMRC issued its Guidelines for the Conduct of Transfer Pricing Enquiries, which included the creation of a specialized Transfer Pricing Group, a transfer pricing review board and a risk-based approach to transfer pricing enquiries. In late 2010, HMRC also issued guidance to its field teams on more extensive use of penalties in transfer pricing cases.

The Chinese tax authority has also adopted a targeted approach, designating 30% of Chinese taxpayers as key audit targets based on selected criteria. The criteria include significant intercompany transactions, consecutive years without taxable income, reduced profit margins and low margins relative to industry peers. The audit initiative will rely on profit-based transfer pricing measures in preference to transactional approaches.

The increased focus on transfer pricing extends to smaller markets, as well. The Australian Taxation Office is planning significant increases in transfer pricing personnel and the launch of a strategic transfer pricing initiative focusing on business restructuring, intra-group financing, mining services and changes in profitability.

Along with increased transfer pricing staffing, tax authorities have or will have at their disposal a number of new or proposed disclosure requirements. These requirements will increase the transparency of taxpayers’ intercompany transactions and their transfer pricing risks. In Latin America, many jurisdictions have mandated transfer pricing disclosure forms, and others have regulations that mandate the submission of transfer pricing reports contemporaneously with the corporate tax return.


More countries, more issues, more tax authority aggression, and more disputes – that’s why transfer pricing is the number one international tax issue for respondents.

More countries, more issues, more tax authority aggression and more disputes — that’s why transfer pricing is a leading international tax issue for respondents.

In the United States, the IRS has also increased penalties for failure to accurately file related-party disclosure forms (Forms 5471 and 5472). It has also introduced Schedule UTP, which requires the disclosure of detailed information on uncertain tax positions, including transfer pricing positions. At the same time, the IRS is developing protocols to conduct joint audits with its treaty partners.

Tax authorities are armed with increasingly sophisticated and broad transfer pricing tools. Since the 2007 Survey, the IRS has issued final transfer pricing regulations for intercompany services and revised temporary regulations for cost-sharing transactions. During the same period, the OECD issued revisions to Chapters I through III of the Transfer Pricing Guidelines along with a new chapter on business restructurings. The Australian tax authorities issued similar guidance on business restructurings in June 2010, and the German administration is expected to soon finalize its July 2009 draft circular on this subject. These regulatory and legislative developments are characterized by a number of common features, including:

• Greater sophistication and flexibility in the selection of transfer pricing methods, including the OECD’s move away from a hierarchy of methods

• The adoption of a “realistic alternatives” criterion into the selection of best method in the US transfer pricing regulations and into the OECD guidelines

• A tendency to extend the scope of a transfer pricing analysis beyond a single party to examine its effect on the profit of the counterparty and/or the full value chain

• The OECD’s prohibition of inappropriate shifting of risk (and profit), which includes the use of either intercompany agreements or “low risk” transfer pricing methods, such as cost-plus arrangements, that divorce risk from the entities that control it

• Enhanced OECD comparability standards mandating more effort and rigor in the selection of benchmarks

• A trend toward macro-level examinations, such as evaluating the effect of business restructurings on the entire value chain or evaluating the aggregate return on investment under a cost-sharing arrangement

• Blurring the lines between transaction types through the recognition of so-called “high-value” services

Even as taxpayers cope with more intense and more sophisticated scrutiny in developed markets, the geographic scope of documentation requirements continues to expand. Since the 2007 Survey, China, France, Greece, Indonesia, Malaysia and Vietnam have all instituted new or significantly enhanced transfer pricing requirements. Even jurisdictions traditionally viewed as tax-favorable, such as Hong Kong and Ireland, have introduced some level of requirement for transfer pricing documentation.

The results of our 2010 Survey reflect both the intensity and the shifting focus of transfer pricing enquiries. Taxpayers find themselves in the challenging position of documenting and defending their transfer pricing in more and more countries. The transaction types they have to cover are increasing, and the emphasis is changing. Controversy is on the rise as increasingly well-staffed tax authorities apply more sophisticated and sweeping transfer pricing tools. At the same time, fortunately, a wider array of dispute resolution channels is available and being used.


This conclusion is supported by tax directors’ answers to another question. Asked how important they expect transfer pricing to be over the next two years, 32% called it “absolutely critical,” up from 29% in 2007. This suggests that the survey respondents are not complacent about their level of transfer pricing risk.

Figure 3: Importance of transfer pricing in the next two years (parents)

2010 2007

Absolutely critical 32% 29%

Very important 42% 45%

Fairly important 21% 18%

Not very important 4% 5%

Not at all important 1% 1%

Figure 4 summarizes the importance respondents attach to transfer pricing by industry. Tax authorities typically target industries with high-value, portable intellectual property and those that generate high margins. It is not surprising, therefore, that more respondents in the pharmaceutical industry rank transfer pricing as their most important tax issue than in any other industry. Because pharmaceutical companies typically deploy valuable intangibles in more than one tax jurisdiction, transfer pricing concerns typically loom large. The pharmaceutical industry has also been exposed to some of the most significant transfer pricing litigation of recent years.

The technology and biotechnology industry, which is also heavily reliant on intangible property, shows the second-highest level of importance. Respondents in industries that typically have lower levels of cross-border transfers, such as transportation, telecommunications and professional services, rank transfer pricing lower among their tax concerns.

Ernst & Young’s 2010 Survey continues to demonstrate the high degree of importance tax departments assign to transfer pricing. More parent company respondents identified transfer pricing as the most important tax issue they face.

Figure 1: Most important tax issues for tax directors (parents)

Thirty percent of tax directors in parent firms worldwide identify transfer pricing as their most important tax issue. In North America, transfer pricing was paramount for 21% of respondents, but percentages were higher in other regions: 30% in Asia-Pacific (APAC) and 33% and in Europe, Middle East, India and Africa (EMEIA). The percentages were highest in Italy (52%) and Denmark (60%). Figure 1 shows the eight other topics that registered among many respondents as the most important tax issue. Tax minimization was the only issue that rivaled transfer pricing.

Figure 2 summarizes the importance tax directors have attached to transfer pricing over the last seven surveys. The peak of concern was in 2005 when almost 60% described it as “very important.” That percentage dropped in 2007 and 2010, but we attribute the declines to respondents’ sense that they have their transfer pricing issues under better control than they did in 2005.

Insights from the surveyTransfer pricing still dominates the tax agenda

0% 5% 10% 15% 20% 25% 30% 35%

Customs duties

Foreign tax credits

Cash repatriation

Tax controversy

Double taxation

Value-added taxes

Cash taxes

Tax minimization

Transfer pricing

Figure 2: Importance of transfer pricing from 1997–2010 (parents)

0%

10%

20%

30%

40%

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60%

2010 2007 2005 2003 2001 1999 1997

Very important Fairly important Not very important Not at all important

30% of tax directors in parent firms worldwide identify transfer pricing as their most important tax issue.


There seems to be some legacy interest by tax authorities in lower-margin industries, such as the automotive and transportation industries. There is also an inconsistency between increased tax authority scrutiny of financial transactions and the rather limited importance banks and financial institutions place on transfer pricing. We expect this perception to change in view of the increasingly sophisticated risk-assessment tools deployed by the tax authorities, which will likely expose financial transactions to more frequent review. We also expect the focus on low-margin business to erode. By contrast, we expect much more interest in businesses with footprints in emerging markets, such as mining, oil and gas and diversified industrial products.

Figure 4: Percentage of respondents ranking transfer pricing as their most important tax issue (parents and subsidiaries)

The practice of transfer pricing is receiving greater attentionThe increased importance MNEs attach to transfer pricing is driving increased deployment of both internal and external transfer pricing resources and elevating the profile of transfer pricing within the organization.

Thirty-one percent of parent respondents report some level of increase in internal transfer pricing headcount, 62% report an increase in the use of external consultants, and 23% report an increase in the use of software and other tools. Sixty-six percent indicate that they had at least one full-time equivalent working on transfer pricing, up from 55% two years ago.

Forty-seven percent of parent respondents say that they have become more responsible to their boards of directors for transfer pricing matters and 41% say they have become more responsible to their audit committees. As shown in Figure 5, ultimate responsibility for transfer pricing remains most often with the tax department (39% of respondents), followed by the chief financial officer or parent company director. Only 8% of parent respondents delegate responsibility to the local affiliate company.

Figure 5: Responsibility for transfer pricing within the organization (parents)

Parent CFO/financial director

Other

Delegated responsibility to local leader

Tax department

Audit committee

39%

38%

8%

3%

12%

0%

Mining, oil and gas

Banking and capital markets

Telecommunications

Power and utilities

Chemicals

Transportation

Media and entertainment

Diversified industrial products

Insurance

Automotive

Professional services

Retail and wholesale

Consumer products

Technology and biotechnology

Pharmaceuticals

40% 50%20%10% 70%60%30% 80%

Respondents confirm ongoing interest of tax authorities in a small number of concentrated industries. This will change in the coming years.


As they pay closer attention to documentation, more companies are adopting a global approach.

The number of parent respondents pursuing a globally coordinated transfer pricing documentation strategy increased from 33% in 2007 to 41% in 2010.

Despite the potential effect of the economic downturn on resources, the number of respondents that do not prepare transfer pricing documentation remains low at 3%.

Figure 8: Approach to transfer pricing documentation (parents)

Companies are paying closer attention to documentation

The heightened scrutiny of transfer pricing, the widening range of jurisdictions with documentation requirements and the increased level of transfer pricing disclosure all increase a taxpayer’s transfer pricing risk. That increased risk is reflected in the enhanced importance survey respondents attach to transfer pricing documentation. Three-quarters of parent respondents in this year’s survey consider documentation more important now than two years ago.

Most parent respondents cite risk-based motivations for preparing documentation. Thirty-six percent identified risk mitigation as their primary motivation in preparing documentation, while the number of respondents citing audit defense as their primary motivation has more than doubled from 2007 to 20%. Fewer than 10% of respondents were motivated by either financial reporting requirements or planning considerations.

Figure 6: Top priority in preparing transfer pricing documentation (parents)

Figure 7: Factors considered highly influential on transfer pricing compliance (parents)

0%

Judged case by case/ strategic or reactive decision

Other

Compliance with financial reporting standards

Minimize compliance costs

Adherence to historic practice/company policy

Consistency of documentation

Audit defense

Risk mitigation/reduction

Ability to identify tax planning opportunities

25%20%15%10%5% 30% 35% 40%

2010 2007

0%

Prepared for a single country, and modified to meet the needs of

other jurisdictions as necessary

Don’t know/not stated

Prepared concurrently, on a globally coordinated basis

Prepared on an as-necessary, country-by-country basis with limited

coordination between countries

Did not prepare transfer pricing documentation

25%20%15%10%5% 30% 40%35% 45%

2010 2007

0% 10% 20% 30% 40% 50% 60% 70%

Internal auditor request

Economic crisis

FIN 48 requirements or equivalent

Audit committee request

External auditor request

Tax department leading practices

Tax audit activities

Consistent with their broader risk-based approach, respondents cite tax audit activities as the most influential factor in determining their transfer pricing compliance (see Figure 7). This finding seems to suggest some degree of recognition by respondents of increased tax audit activity.

Respondents generally take a regional, rather than a country-specific, approach to comparables analysis. Fifty-eight percent of parent respondents indicate that they use regional samples to one degree or another, while only 38% use local comparables for all countries (see Figure 9). Perhaps reflecting the difficulty large MNEs face in assembling local comparable data for a large number of jurisdictions and transactions, the use of regional comparables was more prevalent among those respondents with revenues of $10 billion or more than among smaller companies. With increasing tax authority aggression, MNEs will have to prepare local, as well as regional, comparables for their transfer pricing documentation.


As for the timing of their documentation, just over half (54%) of parent respondents indicate that they prepare documentation contemporaneously with the filing of their corporate income tax return. The level of contemporaneous compliance is generally highest in those jurisdictions with specific contemporaneous documentation requirements, namely Argentina (100%), Mexico (86%), India (78%) and the United States (75%). The level is generally the lowest in those jurisdictions that did not have contemporaneous documentation requirements at the time of this survey, including Italy (29%), France (25%) and Germany (14%).

The results for Canada, which has formal documentation requirements, were anomalous, with only 22% of parent respondents indicating that they prepare their transfer pricing documentation contemporaneously with the filing of the tax return. Figure 11 summarizes contemporaneous documentation practices by jurisdiction.

Figure 11: Contemporaneous documentation by parent company jurisdiction (parents)

0%

Key facts omitted

Economic analysis not accepted

No documentation prepared

Not contemporaneous

Insufficient demonstration of business case for transactions

Incorrect method

Reason not given/arbitrary

Insufficient local focus — comparables

Insufficient local focus — functional analysis

8% 10% 16%4%2% 12% 18%6% 14% 20%

Most respondents rely on regional comparables, but tax authorities increasingly require local comparables. More “glocalization” of benchmarking and comparables studies will be needed to mitigate audit risk.

Figure 9: Approach to comparables sets (parents)

Respondents’ reliance on regional comparables is somewhat surprising given the broadening range of local documentation requirements. The disconnect between regulatory trends and taxpayer practice is reflected in respondents’ audit experiences. Parent respondents cite insufficient local focus on comparables as the most frequent basis on which their documentation was judged inadequate upon audit (see Figure 10). Furthermore, nearly a third of respondents indicate that they were required to perform additional comparables analysis to identify local comparables. No doubt the hot topic of debate in transfer pricing compliance over the next decade will be how to reconcile the need for consistency and simplicity with diverging and increasingly detailed documentation requirements by tax authorities.

Figure 10: Basis on which documentation found inadequate upon audit (parents)

Pan-regional sets, but with exceptions for specific jurisdictional requirements

UnknownPan-regional comparables sets across multiple jurisdictions

Local comparables searches for all countries

4%

27%

38%

31%

0% 20% 40% 60% 80% 100%

UK

Finland

Denmark

Germany

Sweden

Korea

Brazil

Norway

Belgium

Canada

Netherlands

Switzerland

Australia

France

South Africa

Ireland

Japan

US

Spain

Italy

India

Mexico

Argentina

New Zealand


The risk of audit is rising ...

More survey respondents report that they have been subjected to a transfer pricing review. Sixty-eight percent of parent respondents indicate their transfer pricing policy had been examined by tax authorities, up from 52% in the 2007 Survey (see Figure 12).

Figure 12: Incidence of transfer pricing review (parents)

Respondents’ risk of audit varied depending upon their intercompany transactions and their size. The establishment of limited risk distribution structures, material intercompany license transactions and company size are all positively correlated with the risk of transfer pricing review. These findings are consistent with the application by tax authorities of a risk-based approach to transfer pricing reviews. The larger the company, the larger the transfer pricing adjustment it typically yields. Intercompany licensing transactions and limited-risk distribution arrangements, which frequently involve the conversion of a full-fledged distributor with existing marketing intangibles, are typically susceptible to larger adjustments than tangible goods transactions or even service transactions.

While the level of transfer pricing reviews has increased globally, the jurisdictions where those reviews have occurred have shifted since 2007. The United States and other mature transfer pricing jurisdictions head the list of jurisdictions where respondents had experienced a review, but China and India have shown a significant increase in audit activity. The countries showing a reduction in activity are generally those that face resource constraints, focus on a smaller number of high-profile cases or are revising their risk-based approach to case selection. Figure 13 summarizes the geographic distribution of the reviews experienced by respondents.

According to the survey results, there is now a 1 in 5 chance of suffering a material penalty compared with a one in 25 chance in 2005. The increasing imposition of penalties is a function of increasing tax authority resources, as well as tax authorities’ obvious need to raise more revenues. We expect the trend toward increased penalties to continue.

Taxpayers are responding to increased audit activity with an increased reliance on risk assessments.

Sixty-seven percent of parent respondents indicate they have conducted a risk assessment in the past three years, an increase from 53% in the 2007 Survey.

Figure 13: Jurisdiction in which transfer pricing policy was examined in the past four years (among parent companies that had undergone a review since 2006)

2010 2007US 36% 31%Germany 32% 31%France 21% 27%UK 19% 27%Canada 18% 23%Italy 13% 15%China 12% 4%Australia 11% 11%India 11% 6%Japan 9% 12%

Increasing numbers of respondents are experiencing the pains of transfer pricing audits globally. However, the range of countries in which audits occur is shifting, with mature transfer pricing jurisdictions apparently scaling back and emerging jurisdictions scaling up dramatically. The increasing pressure on governments to raise revenues and the dedication of additional transfer pricing enforcement resources are likely to lead to reinvigorated scrutiny in all markets.

The survey results indicate a substantial increase since 2005 in the percentage of adjustments resulting in penalties, as summarized in Figure 14.

Figure 14: Percentage of adjustments resulting in penalties (parents)

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70%

80%

2010 2007

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2010 2007 2005


Published statistics from many tax authorities indicate record levels of APA applications overall. For example, the IRS is at a four-year high while the Canada Revenue Agency is at an all-time high.

The reported use of APAs in our transfer pricing surveys has nearly doubled since the inception of APA programs around the time of our 1999 Survey. The growth in APA use is a function of the increasing availability of APA programs and increasing realization of the value of APAs as dispute resolution tools. We predict that the use of APAs to resolve disputes and to reduce FIN 48 reserves will continue to trend upward. MNEs should consider the strategic use of APAs in both of these areas.

Although only 23% of parent respondents indicate using APAs as a controversy management tool, the level of satisfaction with the APA process among users is high. Ninety percent indicate that they would seek an APA in the future.

The range of jurisdictions in which parent respondents have sought APAs is wide (29 countries). But the principal APA jurisdictions remain those with well-developed transfer pricing regimes, such as the United States, the United Kingdom, the Netherlands, Australia and Japan (see Figure 15).

Figure 15: Top five jurisdictions in which an APA has been used (parents)

… as the controversy management tool chest is growing

A taxpayer’s options for resolving transfer pricing disputes after domestic appeals were historically limited to three: APAs, competent authority relief (through the Mutual Agreement Procedure provision of the relevant treaty) and litigation. Since the 2007 Survey, binding arbitration has arisen as an additional mechanism.

Seventy-nine percent of parents report that they are generally satisfied with the APA process. However, many remain unconvinced (or unaware) of the benefits of APAs: fewer than half (47%) of parent respondents not already using APAs say they would consider using them in the future.

The 2010 Survey results show slightly increased reliance on the competent authority process, reversing a moderate trend from 2003 through 2007 of decreased reliance. While the trend from 2003 to 2007 may have resulted from the increased availability of APAs and a general desire by taxpayers to manage controversy risk prospectively, the 2010 results may reflect a global trend toward increased bilateral and multilateral transfer pricing dispute resolution. Figure 16 summarizes the pattern over time.

Figure 16: Respondents referring a matter to competent authority in the previous four years

2010 2007 2005 2003

Parents 18% 17% 18% 18%

Subsidiaries 17% 11% 13% 16%

The newly available binding arbitration process has yet to be used by a significant number of respondents, with only 14 parent respondents (2%) indicating they have pursued this option in a transfer pricing controversy.

Litigation of transfer pricing disputes remains infrequent, with only 11% of parent respondents overall pursuing this avenue. The only jurisdiction with significant litigation activity is India, where 50% of respondents have relied on litigation for the resolution of transfer pricing disputes.

As summarized in Figure 17, competent authority is the preferred method among parent respondents for resolving transfer pricing disputes.

Figure 17: Preferred methods of resolving transfer pricing disputes (parents)

AustraliaUSA UK Netherlands Japan

2010 2007 2005 2003 2001

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45%

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Competent authority APA Litigation Binding arbitration


Transfer pricing rules are in flux

Regulations and resulting practice are in flux all over the world. For example, during the last three years, both the OECD and the US Treasury issued significant new transfer pricing regulations or guidelines. Similarly, a wide range of countries — from Germany and Italy to Russia and China — have delivered or are at least in the process of implementing significant revisions to their rules and practices.

In the United States, the 2008 temporary cost-sharing regulations and the 2009 final service regulations reflect the increased importance the IRS attaches to service and intangible transactions. These regulations also introduce a new level of sophistication, as evidenced by their sheer length in comparison to the original regulations they superseded.

The OECD’s revisions to Chapters I through III of the Transfer Pricing Guidelines signal a shift from the OECD’s historically strong preference for transactional methods toward accepting profit-based methods. The OECD’s Restructuring Chapter signals a new scrutiny of business restructuring transactions.

Our survey responses reflect broad awareness of such developments. Sixty-two percent of parent respondents headquartered in OECD countries indicate awareness of the OECD discussion draft, Transfer Pricing Aspects of Business Restructuring. Awareness of the US cost-sharing regulations was high among US parent respondents at 66%. However, the figure is a mere 28% among parent respondents with headquarters in other jurisdictions. Fifty-three percent of parent respondents indicate that they were altering their transfer pricing policies in response to regulatory changes.

Based on our survey, taxpayers are not yet moving toward profit-based methods — even though such methods are increasingly preferred by tax authorities. Parent respondents instead continue to show a strong preference for transactional methods in establishing pricing for tangible goods, services and intangible goods (see Figures 18 through 20).

Despite the increased importance of profit-based methods in the OECD and in many countries in transfer pricing audits, we still observe a minority of respondents using profit-based methods. We predict that regulatory shifts will result in a dramatic increase in the use of profit-based methods as corroborative, or sometimes primary, transfer pricing methods. We have already begun to see this trend in high-profile controversy cases. Survey readers should begin to consider the importance of profit-based methods in their transfer pricing planning and documentation.

Figure 18: Transfer pricing methods used in establishing tangible goods pricing (parents)

Cost plus 30%

Benchmark of third-party prices (CUP method) 27%

Profit-based method (CPM/TNMM) 23%

RPM (resale price method)/resale minus 12%

Profit split 3%

Other 6%

Figure 19: Transfer pricing methods used in establishing service transaction pricing (parents)

Cost plus 52%

Benchmark of third-party prices (CUP method) 21%

TNMM 11%

At cost 7%

Value-based service fees 2%

Other 6%

Figure 20: Transfer pricing methods used in establishing intangible goods licensing (parents)

Third-party benchmark agreement between the company and an unrelated party

22%

Third-party benchmark agreement between two parties unrelated to the company

21%

Profit-based method (CPM/TNMM) 21%

Profit split 9%

Other 25%

Don’t know/not stated 3%


Parent respondents also report more intrusive transfer pricing examinations with requests for all categories of documents and sources above their 2007 levels. In line with the increased scrutiny of the commercial basis for intercompany pricing policies, tax authority requests for access to company operational personnel increased significantly from 36% in 2007 to 49% in the current survey. As tax authorities have expanded their analyses beyond a single party to examine effects on the profit of the counterparty, requests for foreign affiliate financial records and management accounts have increased. Intercompany agreements (not covered in the 2007 Survey) stood out as an almost universal request in transfer pricing audits.

While MNEs may not be consistent with current regulatory trends in their choice of transfer pricing methods, their prioritization of transactions susceptible to review is aligned with the audit priorities established by the major tax authorities. Parent respondents ranked services, financing and intangible transactions as among the most susceptible to transfer pricing review (see Figure 21).

Parent respondents ranked services, financing and intangible transactions as among the most susceptible to transfer pricing review, and all categories of transactions as more susceptible to review than in 2007.

Tax authority examinations reflect the same increased focus on service and intangible transactions, with intercompany loans also showing a striking increase in scrutiny. As shown in Figure 22, 42% of respondents that underwent a transfer pricing examination report that their intercompany financing was examined, up from only 7% in the 2007 Survey. Sixty-six percent report that their intercompany service transactions were examined, up from 55% in the 2007 Survey.

Figure 21: Transactions most susceptible to review by tax authorities (parents)

Figure 22: Most significant transfer pricing examination (parents)

Figure 23: Requests made in transfer pricing audit (parents)

10% 20% 30% 40% 50% 60% 70%0%

Don’t know/not stated

Other

None

Treatment of stock-based compensation

Imputed or increased compensation/indemnification payments for business change

Sales of raw materials or componentsbetween group companies

Commission for sales/transfer of goods

Transfer or sales of finished goods for resale

Cost sharing/cost contribution agreements

License of intangible property

Technical services

Intercompany financing

Administrative or managerial services

20072010

20072010

10% 20% 30% 40% 50% 60% 70%0%

Imputed or increasedcompensation/indemnificationpayments for business change

Other/don’t know

Cost sharing/cost contribution agreements

License of intangible property

Intercompanyfinancing

Transfer of sales oftangible goods

Services

20072010

10% 20% 30% 40% 50% 60%0%

None of these

Disclosure and specification of uncertaintax positions in statutory accounts

Other company documents not specificallyprepared for transfer pricing purposes

Correspondencewith tax advisors

Internal documents relating totax input on business change

Access to the company’s EDPsystem/other computer records

Financial records offoreign affiliates

Access to companyoperational personnel


Restructuring efforts and the pursuit of a more tax-efficient supply chain are becoming more complex

At precisely the time when companies need to achieve greater efficiency in all areas — business and tax alike — a number of transfer pricing developments are presenting challenges to MNEs who are restructuring their businesses. The IRS, for example, released a Coordinated Issue Paper on buy-ins related to cost-sharing arrangements and revised cost-sharing regulations. Similarly, the OECD has issued its Chapter IX focusing on business restructurings. At the same time, the tax effects of business restructurings are receiving increased scrutiny from the press and the US Congress.

Our 2010 Survey queried respondents in detail on their business change and restructuring activities. These questions covered the nature of their business restructurings, the consideration of tax implications in business restructurings and the timing of restructuring activity.

Figure 24 presents the types of business changes undertaken by parent respondents since 2006 in total and by region.

Cost reduction and IT system implementation or improvement projects were the most common categories of business change. The focus on cost reduction is unsurprising in the context of the current economic downturn. However, the prevalence of IT projects, which are typically costly, is somewhat unexpected. Outsourcing or off-shoring of supply chain functions were the least prevalent business change projects among survey respondents.

Approximately half of all parent respondents have embarked on either supply chain optimization or centralization of business or management functions since 2006. The prevalence of these structures varies significantly by industry. In the chemical industry, for example, where products tend to be bulky and supply chains difficult to reengineer, 49% of parent respondents undertook supply chain optimization projects in the last four years. Respondents from the pharmaceuticals and telecommunications industries, on the other hand, indicate considerably higher levels of supply chain optimization.

With the increasing relative growth opportunities provided by emerging markets, companies are shifting focus to India, China and Brazil. Such shifts provide opportunities and motivation for supply chain reengineering.

Figure 24: Categories of business change implemented since 2006 (parents)

Total EMEIA Americas APAC

Cost reduction 78% 81% 85% 57%

IT system implementation/improvement

74% 74% 83% 60%

Entry into new markets/new product lines

71% 75% 76% 51%

Post-merger integration/acquisitions

63% 67% 66% 46%

Supply chain optimization

50% 53% 49% 39%

Centralization of business or management functions

50% 55% 50% 30%

Outsourcing or off-shoring of supply chain functions

26% 26% 35% 14%


Geographically, there are significant differences in business restructuring activity, with the Americas and EMEIA showing higher levels of all categories of business change than the APAC region. The rapidly changing global business footprint and its eastward shift suggest that the APAC region will require intense focus by tax departments in the coming years, as MNEs play catch-up to accomplish in the APAC region what they already have in EMEIA and the Americas.

There is little regional variation in the relative ranking of business change projects. However, there are marked, if not surprising, variations in the absolute levels of business change implementation. The EMEIA and Americas regions return very similar levels of activity, while APAC respondents, where companies tend to be less mature, indicate significantly lower levels of business change.

The survey reveals that a significant portion of business restructurings involve intangibles. Given governments’ focus on intangibles — both incentives to retain or attract to their jurisdictions (e.g., the recent UK announcements on the patent box) and enforcement efforts — we can expect continued examination, controversy and litigation activity in this area.

Figure 25: Centralization of management and supply chain optimization by industry (parents)

0%

Consumer products

Professional services

Power and utilities

Automotive

Chemicals

Insurance

Diversified industrial products

Banking and capital markets

Technology and biotechnology

Transportation

Mining, oil and gas

Media and entertainment

Retail and wholesale

Pharmaceuticals

Telecommunication

40% 50%20%10% 70%60%30% 80%

Supply chain optimization


In spite of greater complexity and added documentation requirements, companies are still pursuing a wide array of business restructuring, streamlining and supply chain reconfiguration due to business necessity. Figure 26 summarizes the business restructurings that parent respondents have implemented, both in total and by region.

Figure 26: Business restructurings implemented or being pursued (parents)

Total EMEIA Americas APAC

Centralized intangible property ownership and management

42% 47% 40% 30%

Cost-sharing/buy-in agreements

39% 46% 35% 24%

Intangible property planning

36% 37% 40% 26%

Shared service centers in low-cost jurisdiction

35% 35% 47% 15%

Contract R&D 34% 36% 35% 25%

Centralized or regional procurement company

34% 36% 38% 20%

Limited-risk distributor(s)

30% 33% 34% 12%

Global or regional principal or central entrepreneur

28% 27% 33% 25%

Limited-risk service providers

27% 30% 31% 15%

Single regional sales/marketing entity

27% 28% 29% 21%

Limited-risk manufacturing

23% 25% 28% 9%


Figure 28 summarizes the timing of parent respondents’ business restructuring activities.

Figure 28: Timing of business restructuring activities (parents)

2005– 2010

2001– 2004

Prior to 2000

Don’t know

Centralized intangible property ownership and management

37% 18% 36% 9%

Centralized or regional procurement company

59% 13% 24% 5%

Contract R&D 53% 16% 25% 6%

Cost-sharing/buy-in agreements

52% 21% 22% 5%

Global or regional principal or central entrepreneur

44% 24% 25% 7%

Intangible property planning

51% 15% 25% 9%

Limited-risk service providers

52% 20% 22% 7%

Limited-risk distribution

43% 27% 27% 3%

Limited-risk manufacturing

43% 24% 28% 5%

Shared service centers in low-cost jurisdiction

66% 22% 9% 3%

Single regional sales/marketing entity

47% 21% 26% 6%

The 2005–2010 period saw an upsurge in restructuring activity after a lull in the 2001–2004 period. Centralization of intangible property management, in particular, rebounded during the 2005–2010 period with a 36 percentage point increase. Other forms of planning related to intangible property, such as contract R&D, also increased in the 2005–2010 period. Regional procurement companies, which were among the least popular forms of planning before 2005, have moved into first place among planning structures.

Given the significant role intangibles play in today’s businesses, restructurings focused on intangibles, including contract R&D, are particulaly prevalent. Less popular are centralized procurement and global or regional principal structures. Limited-risk manufacturing structures are the least common forms of restructuring. This is not surprising because many companies have already established manufacturing in low-cost, tax-competitive jurisdictions, employ “manufacturing-lite” business models or are not involved in manufacturing activities at all.

Again, the survey shows that respondents are generally aware of the need to consider tax implications in the planning and implementation of business restructuring projects. Figure 27 summarizes the consideration of tax implications in the various categories of business change.

Figure 27: Consideration of tax implications in business change (parents)

Yes No Don’t know/ not stated

Post-merger integration 91% 7% 1%

Outsourcing or off-shoring of supply chain functions

81% 17% 2%

Entry into new market/new product lines

79% 19% 2%


77% 22% 1%

Supply chain optimization 75% 23% 2%

IT systems implementation/improvement

66% 32% 2%

Cost reduction 62% 37% 1%

Other forms of business change 62% 23% 15%

Awareness of the need to consider tax implications is foremost in post-merger integration (91%) and outsourcing/off-shoring (81%) projects.

Conclusion


In the many years that Ernst & Young has been tracking transfer pricing trends, a number of core themes have emerged. However, this year’s survey uncovered some subtle differences and new areas for MNEs to consider.

MNEs must take a more proactive approach to transfer pricing. The risk of challenge by the authorities continues to increase. In their quest for more revenue, tax authorities have become better at auditing, with higher hit rates for adjustments and higher levels of penalties. Documentation needs to cover more countries — witness China — and more types of transactions, as evidenced by the dramatically increased scrutiny of loans and financial transactions. Despite the need to cover more countries, globally consistent documentation will need to accommodate the increasing trend toward “glocalization.” Two of the most commonly cited reasons for suffering audit adjustments were insufficient local tailoring of facts and insufficient local benchmarking of prices or margins. Risk-based assessments will need to find a balance between global strategy and local detail, a change we are seeing first-hand with some of our largest, most sophisticated transfer pricing clients.

MNEs should pursue a more proactive and extensive use of APAs where there is reliable availability. MNEs will see more instances of potential double taxation. Instead of waiting to react to controversy, MNEs will need to plan for it by learning how to handle domestic appeals, competent authority proceedings, alternative dispute resolution mechanisms and APAs. Although more than a third of respondents prefer the Mutual Agreement Procedure for dispute resolution, we anticipate more litigation where it is not an option.

The recession and regulatory uncertainty seem to have stemmed the amount of business-driven tax planning in the last few years. We see great challenges for MNEs in dealing with the transfer pricing implications of business change. Given the significant increase in regulations over the past few years, more complex transfer pricing designs are warranted to meet the new high standards set by the OECD and regulators in countries like Germany.

Taxpayers should reinforce their transfer pricing documentation for intercompany services, licensing and financing transactions. This year’s survey highlights the increasing scrutiny these transactions are receiving from tax authorities. Unlike tangible goods transactions, where cost of production or acquisition can serve as a reference point for value, the valuation of services, licensing and financing transactions is more complex, being primarily related to value rather than costs. As a result, tax authorities recognize that these transactions have the potential to generate significant adjustments. At the same time, it is our experience that transfer pricing documentation for services and intercompany financing transactions often lags behind documentation of tangible goods transactions. Taxpayers should ensure that their services, intangibles and financing policies and documentation can withstand the rigors of the current transfer pricing environment.

Ernst & Young’s Global Transfer Pricing group expects the next few years to be dynamic and exciting as MNEs exercise greater rigor to meet increasingly onerous requirements. In the end, we anticipate more movement across the gamut of transfer pricing areas — preparing documentation to meet compliance requirements and mitigate penalties; managing audits, resolving disputes and eliminating double taxation; and harnessing business change in a tax-efficient manner. We look forward to sharing the journey with readers of this survey!


Country-specific findings from the surveyThe preceding pages outline the key global findings and include a series of comparable tables focusing on key questions posed in the 2010 Survey. Readers are able to use the following tables to compare the findings for individual countries with the global and respective regional findings.

Argentina

India

China

Netherlands

Spain

Australia

Ireland

Denmark

New Zealand

Sweden

Belgium

Italy

Finland

Norway

Switzerland

Brazil

Japan

France

South Africa

United Kingdom

Canada

Mexico

Germany

South Korea

United States


Americas


Contact:Carlos [email protected] +54 11 4318 1619Argentina

Argentina (Parents)

Americas (Parents)

Global (Parents)

Importance of transfer pricing

Transfer pricing is the most important tax issue for their group 25% 22% 30%

Transfer pricing will be “absolutely critical” or “very important” for their group in the next two years

25% 77% 74%

Transfer pricing documentation is more important now than it was two years ago 63% 70% 74%

Audit experience

Transfer pricing policy has been examined by a tax authority in any country since 2006 38% 70% 68%

Examinations resulting in an adjustment (known outcomes) 0% 21% 30%

Transfer pricing documentation viewed as adequate upon audit 100% 75% 69%

Tax authority threatened to impose penalties NA 31% 35%

Penalties were imposed (known outcomes) NA 13% 19%

Conducted a risk assessment since 2006 38% 69% 67%

Tax authority requested access to intercompany agreements during audit 100% 85% 84%

Tax authority requested access to operational personnel during audit 67% 53% 49%

Service transactions have undergone review 33% 61% 66%

Intercompany financing transactions have undergone review 67% 29% 42%

Transfer pricing strategies and practices

Highest priority in driving transfer pricing strategy is tax risk management 38% 46% 50%

Transfer pricing documentation is prepared concurrently, on a globally coordinated basis

50% 38% 41%

Use pan-regional comparable sets across multiple jurisdictions 57% 25% 27%

Use pan-regional sets, but with exceptions for specific jurisdictional requirements 0% 33% 31%

Trends in transfer pricing approach and enforcement

Awareness of OECD discussion draft on the allocation of profits to permanent establishments

38% 68% 65%

Awareness of US cost-sharing regulations 13% 61% 37%


Contact:Gil Mendes [email protected] +55 11 2112 5466Brazil

Brazil (Parents)

Americas (Parents)

Global (Parents)




72% 77% 74%


Audit experience




Tax authority threatened to impose penalties 0% 31% 35%

Penalties were imposed (known outcomes) 0% 13% 19%









24% 38% 41%





56% 68% 65%



Contact:Sean Kruger [email protected]+1 416 941 1761Canada

Canada (Parents)

Americas (Parents)

Global (Parents)




72% 77% 74%


Audit experience














48% 38% 41%





80% 68% 65%



Contact:Jorge Castellon [email protected] +1 52 55 5283 8671Mexico

Mexico (Parents)

Americas (Parents)

Global (Parents)




100% 77% 74%


Audit experience














41% 38% 41%





69% 68% 65%



Contact:Purvez [email protected] +1 713 750 8341United States

US (Parents)

Americas (Parents)

Global (Parents)




79% 77% 74%


Audit experience














38% 38% 41%





70% 68% 65%



Asia-Pacific


Australia (Parents)

Asia-Pacific (Parents)

Global (Parents)




68% 67% 74%


Audit experience














48% 22% 41%





76% 50% 65%


Contact:Paul [email protected]+612 9248 4952Australia


Contact:Luis [email protected] +86 21 22283366China

China (Parents)


Global (Parents)




60% 67% 74%


Audit experience














10% 22% 41%





70% 50% 65%



Contact:Kai Hielscher [email protected] +49 89 14331 16711Japan

Japan (Parents)


Global (Parents)




77% 67% 74%


Audit experience














7% 22% 41%





53% 50% 65%



Contact:Mark [email protected] +64 9 300 7085

New Zealand (Parents)


Global (Parents)




80% 67% 74%


Audit experience














47% 22% 41%





47% 50% 65%


New Zealand


South Korea (Parents)


Global (Parents)




54% 67% 74%


Audit experience














7% 22% 41%





20% 50% 65%


Contact:Rap Choi [email protected] +82 2 3770 1001South Korea


EMEIA


Contact:Herwig [email protected] +32 02 774 9349Belgium

Belgium (Parents)

EMEIA (Parents)

Global (Parents)




85% 75% 74%


Audit experience














65% 49% 41%





75% 69% 65%



Contact:Thomas [email protected] +45 3 587 2901Denmark

Denmark (Parents)

EMEIA (Parents)

Global (Parents)




92% 75% 74%


Audit experience














60% 49% 41%





60% 69% 65%



Contact:Kennet [email protected] +358 4055 61181Finland

Finland (Parents)

EMEIA (Parents)

Global (Parents)




75% 75% 74%


Audit experience














54% 49% 41%





75% 69% 65%



Contact:Franck [email protected] +33 4 78 63 17 10France

France (Parents)

EMEIA (Parents)

Global (Parents)




76% 75% 74%


Audit experience














44% 49% 41%





80% 69% 65%



Contact:Oliver [email protected] +49 211 9352 10627Germany

Germany (Parents)

EMEIA (Parents)

Global (Parents)




76% 75% 74%


Audit experience














48% 49% 41%





76% 69% 65%



Contact:Vijay [email protected] +91 981049 5203India

India (Parents)

EMEIA (Parents)

Global (Parents)




55% 75% 74%


Audit experience














40% 49% 41%





75% 69% 65%



Contact:Dan McSwiney [email protected] +353 1 2212 094Ireland

Ireland (Parents)

EMEIA (Parents)

Global (Parents)




70% 75% 74%


Audit experience














45% 49% 41%





75% 69% 65%



Contact:Davide Bergami [email protected] +39 02 851 4409Italy

Italy (Parents)

EMEIA (Parents)

Global (Parents)




73% 75% 74%


Audit experience














26% 49% 41%





34% 69% 65%



Contact:Danny [email protected] +31 88 40 71007Netherlands

Netherlands (Parents)

EMEIA (Parents)

Global (Parents)




68% 75% 74%


Audit experience














48% 49% 41%





72% 69% 65%



Contact:Marius [email protected] +47 24 00 23 86Norway

Norway (Parents)

EMEIA (Parents)

Global (Parents)




76% 75% 74%


Audit experience














40% 49% 41%





56% 69% 65%



Contact:Karen [email protected] +27 21 443 0200South Africa

South Africa (Parents)

EMEIA (Parents)

Global (Parents)




80% 75% 74%


Audit experience




Tax authority threatened to impose penalties NA 36% 35%

Penalties were imposed (known outcomes) NA 18% 19%









40% 49% 41%





90% 69% 65%



Contact:Juan Jose Terraza [email protected] +34 933 663 741Spain

Spain (Parents)

EMEIA (Parents)

Global (Parents)




50% 75% 74%


Audit experience














38% 49% 41%





63% 69% 65%



Contact:Mikael [email protected] +46 8 520592 35Sweden

Sweden (Parents)

EMEIA (Parents)

Global (Parents)




73% 75% 74%


Audit experience














54% 49% 41%





54% 69% 65%



Contact:Edvard [email protected]+41 58 286 4250Switzerland

Switzerland (Parents)

EMEIA (Parents)

Global (Parents)




92% 75% 74%


Audit experience














73% 49% 41%





88% 69% 65%



Contact:Tim [email protected] +44 20 7951 1149United Kingdom

UK (Parents)

EMEIA (Parents)

Global (Parents)




74% 75% 74%


Audit experience














47% 49% 41%





68% 69% 65%



Methodology

Consensus Research International, London, was again commissioned by Ernst & Young to carry out the 2010 Global Transfer Pricing Survey. The survey is a detailed investigation of transfer pricing practice and strategy among MNEs. In effect, there are two surveys: one of parent companies interviewed from the MNE headquarters perspective, and one of inbound subsidiaries, interviewed from the local operating company perspective.

The 2010 Survey encompassed the same 24 markets researched in 2007 plus South Africa. Tables 1 and 2 show the countries included in the parent and subsidiary interviews, respectively. All interviews were conducted by telephone.

Table 1: Countries surveyed in parent study

1997 1999 2001 2003 2005 2007 2010

Argentina Argentina Argentina Argentina Argentina Argentina

Australia Australia Australia Australia Australia Australia Australia

Belgium Belgium Belgium Belgium Belgium

Brazil Brazil Brazil Brazil Brazil Brazil

Canada Canada Canada Canada Canada Canada Canada

China China

Denmark Denmark Denmark Denmark Denmark Denmark

Finland Finland Finland Finland Finland Finland

France France France France France France France

Germany Germany Germany Germany Germany Germany Germany

India India

Ireland Ireland Ireland Ireland Ireland

Italy Italy Italy Italy Italy Italy Italy

Japan Japan Japan Japan Japan Japan Japan

Korea Korea Korea Korea Korea Korea Korea

Mexico Mexico Mexico Mexico Mexico Mexico

Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands

New Zealand New Zealand New Zealand New Zealand New Zealand

Norway Norway Norway Norway Norway Norway

South Africa

Spain Spain Spain Spain Spain Spain

Sweden Sweden Sweden Sweden Sweden Sweden Sweden

Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland

UK UK UK UK UK UK UK

US US US US US US US


Table 2: Countries surveyed in subsidiary (inbound) study

1997 1999 2001 2003 2005 2007 2010

Argentina Argentina Argentina Argentina Argentina

Australia Australia Australia Australia Australia

Canada Canada Canada Canada Canada Canada

China China

France France France France France France France

Germany Germany Germany Germany Germany Germany Germany

India India

Italy Italy Italy Italy Italy

Japan Japan Japan Japan

Korea

Mexico Mexico Mexico Mexico Mexico Mexico

Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands

New Zealand New Zealand New Zealand New Zealand New Zealand

South Africa

UK UK UK UK UK UK UK

US US US US US US US

Venezuela

The sample was obtained from Dun & Bradstreet in the United Kingdom. Some markets were augmented using local Ernst & Young lists, ensuring that all companies conformed to the overall specification criteria. Thanks to the long history of our survey, we are able to ensure a strong consistency in our sample data. All companies were first qualified for inclusion, and any that failed to meet the qualification criteria were screened out at the start of the interview. The sample universe can be described as all global ultimates of MNEs (i.e., the company is headquartered in that market, not a subsidiary) that meet the following criteria:

• If an MNE’s headquarters was in the US, Canada, Australia or one of the Asian markets, the firm qualified for inclusion in the survey if its revenue was at least US$1 billion and it had affiliates/subsidiaries on at least two other continents.

• If headquartered in one of the European markets, the MNE needed revenue of US$1 billion and affiliates/subsidiaries in at least five other countries anywhere in the world.

• If headquartered in South Africa, the MNE needed revenue of US$1 billion and affiliates/subsidiaries on at least one other continent.

• If headquartered in Latin America or New Zealand, the MNE needed revenue of at least US$500 million and affiliates/subsidiaries on at least two other continents.

In all regions, if the list of companies that met these thresholds was too short, the survey was extended to MNEs with slightly lower revenue.

Sample


Parents

Turnover in US$ Proportion % (Base 647)

Up to $1 billion 26%

$1 billioin–$4.99 billion 41%

$5 billion–$9.99 billion 12%

$10 billion or more 20%

Other 1%

Subsidiaries

Turnover in US$ Proportion % (Base 230)

Up to $1 billion 69%



$10 billion or more 7%

Other 3%

The group revenue profile of the sample companies is detailed in the following tables:

Revenue profile

Interviews were carried out with the person with ultimate responsibility for tax policy and strategy in each organization. Most often this was the tax director, but also included were chief financial officers and directors of finance. Interviews were carried out between June and August 2010.

We would like to sincerely thank all of the executives who participated in our survey.

FieldworkThe analysis and preparation of the survey results were conducted by Ernst & Young transfer pricing professionals throughout the world, and we would like to thank in particular the following colleagues for their contribution: Alexander Lorimer, Karen Miller, Leighanne Eagleeye, Melissa Heath, Nitin Jain, Per Juvkam-Wold, Ulrike Wolff, Vishal Rai and Yoshiko Sato.

Analysis


Glossary of terms

APA (advance pricing agreement) An agreement between a tax authority and an MNE about the determination of the appropriate transfer pricing method to be used for pricing intercompany transactions. APAs may be unilateral, bilateral (two governments) or multilateral (three or more governments).

Arm’s length principleThe standard adopted by the OECD that transactions between members of an MNE should reflect conditions that would be made between independent enterprises.

CFC (controlled foreign corporation)A subsidiary and member of an MNE group.

CPM (comparable profits method)Under the comparable profits method of Income Tax Regulations Section 1.482-5, an arm’s length result is determined by comparing the operating profit of the “tested” party with the operating profit of an uncontrolled party involved in comparable transactions. Thus, the CPM looks at profits rather than transactions. Generally, the tested party’s profit is measured in terms of profit level indicators such as rate of return on capital employed or the ratio of gross profit to operating expenses. The regulations state that the tested party should normally be the “least complex” of the controlled entities. Income Tax Regs. § 1.482-5(b)(2).

CSA (cost-sharing arrangements)

CUP (comparable uncontrolled price)A transfer pricing method that compares the price for property or services in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.

ETR (effective tax rate)

EU (European Union)The European Union, currently consisting of 27 member states.

EUJTPF (EU Joint Transfer Pricing Forum)The EU Joint Transfer Pricing Forum, consisting of representatives of governments and the private sector who advise and consult on transfer pricing issues.

FTE (full-time equivalent)Used in this survey to indicate the number of resources employed by tax authorities to undertake transfer pricing reviews in their jurisdictions.

GAAP (generally accepted accountingprinciples)

MNE (multinational enterprise)A member of a related group that carries on business directly or indirectly in two or more countries.

MAP (Mutual Agreement Procedure)A dispute resolution process found in Article 25 of the OECD Model Tax Convention. MAP is a government-to-government process of negotiation to resolve matters of taxation not in accordance with the particular tax treaty and to attempt to avoid double taxation.

OECD (Organisation for Economic Co-operation and Development)An intergovernmental organization, based in Paris, formed to foster international trade and economic development. The OECD has 30 member states. Among its many concerns are the removal of tax barriers to the free flow of goods and services and the avoidance of double taxation of income or profits. The OECD has developed guidelines and a model tax convention — see on the following page.


OECD GuidelinesTransfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published by the OECD between 1995 and 1998. The OECD Guidelines endorse the arm’s length principle and consist of a statement of principle rather than a set of specific rules to be applied.

OECD Model Tax Convention Published in July 2005 as the Model Tax Convention on Income and on Capital. The Model Tax Convention is to be used by member states in negotiations of bilateral double tax treaties. The OECD also provides commentary on the interpretation of the Model Tax Convention and states that member countries should follow this commentary, subject to their expressed reservations thereon, when applying and interpreting their double tax treaties.

MoU (memorandum of understanding)

PLI (profit level indicator)Ratio that measures the relationship between an entity’s profit and the resources invested or costs incurred to achieve those profits. Refer to “CPM” for further discussion of their application.

PATA (Pacific Association of Tax Administrators)An association of the tax administrations of Australia, Canada, Japan and the United States formed to foster cooperation between and the exchange of information among them. PATA has published guidance on APAs, MAPs and documentation requirements.

QCSA (qualified cost-sharing arrangement)

Schedule UTP (uncertain tax positions)In the United States, the IRS has introduced Schedule UTP, which requires the disclosure of detailed information on positions affecting US federal income tax liability, including transfer pricing positions.

TNMM (transactional net margin method)The transactional net margin method is a profits-based method that compares the profitability of an MNE member to the profits of comparable entities undertaking similar transactions. The CPM in the United States is similar to the TNMM.


Ernst & Young Transfer Pricing country contacts

Thomas [email protected]+49 211 9352 10601

Global contacts

Esther [email protected]+44 20 7980 0720

John [email protected]+44 207 951 6438

Craig [email protected]+44 20 7951 6271

▌ Ireland

Dan [email protected]+353 1 2212 094

▌ Argentina

Carlos [email protected]+54 11 4318 1619

▌ Albania

Alexandros [email protected]+35 542 419 574

▌ Australia Paul [email protected]+612 9248 4952

▌ Austria

Andreas [email protected]+43 1 211 70 1041

▌ Belgium

Herwig [email protected]+32 02 774 9349

▌ Bulgaria

Laszlo [email protected]+35928177141

▌ Brazil

Gil [email protected]+55 11 2112 5466

▌ Canada

Sean [email protected]+1 416 941 1761

▌ Chile

Osiel [email protected]+56 2676 1141

▌ Estonia

Ranno [email protected]+372 611 4578

▌ Finland

Kennet [email protected]+358 4055 61181

▌ France

Franck [email protected]+33 4 78 63 17 10

▌ Germany

Oliver [email protected]+49 211 9352 10627

▌ Greece

Aggelos [email protected]+302102886024

▌ Hong Kong

Patrick [email protected]+852 28469905

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▌ India

Vijay [email protected]+91 981049 5203

▌ Indonesia

Carlo [email protected]+62 21 5289 5000

▌ Colombia

Gustavo [email protected]+1 571 651 2210

▌ Costa Rica

Rafael [email protected]+1 212 773 4761

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Denes [email protected]+36 1 451 8209

▌ Czech Republic

Libor [email protected]+420 225 335 310

▌ Ecuador

Javier [email protected]+1 593 2 255 5553

▌ Denmark

Thomas [email protected]+45 3 587 2901

▌ Egypt

Sherif [email protected]+202 3336 6627

▌ China

Luis [email protected]+86 21 22283366


▌ United States

Purvez [email protected]+1 713 750 8341

▌ Venezuela

Katherine [email protected]+58 212 953 5222

▌ Vietnam

Nitin [email protected]+84 8 3824 5252

▌ United Kingdom

Tim [email protected]+44 20 7951 1149

▌ Turkey

Feridun [email protected]+90 212 368 5204

▌ Thailand

Anthony Loh [email protected]+662 264 0777

▌ Switzerland

Edvard [email protected]+41 58 286 425

▌ Taiwan

George [email protected]+86 21 2228 8888

▌ Israel

Lior [email protected]+972 3 623 2749

▌ Italy

Davide [email protected]+39 02 851 4409

▌ Japan

Kai [email protected]+49 89 14331 16711

▌ Kazakhstan

Roman [email protected]+7 727 258 5960

▌ South Korea

Rap [email protected]+82 2 3770 1001

▌ Netherlands

Danny [email protected]+31 88 40 71007

▌ Latvia

Ilona [email protected]+371 704 3836

▌ Malaysia

Janice [email protected]+6 03 7495 8223

▌ Mexico

Jorge [email protected]+52 55 5283 8671

▌ Lithuania

Leonas [email protected]+370 5 274 2279

▌ New Zealand

Mark [email protected]+64 9 300 7085

▌ Norway

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▌ Peru

Marcial [email protected]+51 1 411 4424

▌ Sweden

Mikael [email protected]+46 8 520592 35

▌ Spain

Ramon Palacin [email protected]+34 915 727 485

▌ Philippines

Romulo [email protected]+63 2 891 0307

▌ Poland

Aneta [email protected]+48 22 557 8996

▌ Romania

Alexander [email protected]+402 1402 4000

▌ Russia

Henrik [email protected]+7 495 648 9608

▌ Singapore

Jesper [email protected]+65 6309 8038

▌ Slovenia

Denes [email protected]+36 1 451 8209

▌ Slovak Republic

Gunter [email protected]+421 2 333 39610

▌ Portugal

Paulo [email protected]+351 21 791 2045

▌ South Africa

Karen [email protected]+27 21 443 0200

Ernst & Young

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EYG/OC/FEA no. DL0344

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