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one affiliate to another in an inter-company
transaction involving the transfer of goods,
services or intangibles should show results
that are consistent with results that would
have been realized if uncontrolled taxpayers
had engaged in the same transaction under
the same circumstances.
“It’s been growing in importance for some
time, because as countries have begun to exchange information and work together with
financial structures used to move income
from one country to another, transfer pricing
is becoming one of the few ways to determine
how much income goes from one country to
another,” said Reynolds.
A subset of the transfer pricing issue is the
divergence between the Organization for
Economic Cooperation and Development,
consisting primarily of developed countries,
and the developing world.
“The OECD method assumes you should
get paid for what you do and the risks you
take on in doing it,” said Reynolds. “So if
you’re taking on more activities and risk, you
should make more money. It looks at what
is going on in each country, and is based on
having reliable information in corporate financial reports, which don’t exist in many
developing countries.”
“Less-developed countries are trying to
find a pricing method that doesn’t require
comparable information,” he said. “At the
same time, the philosophy in the less-developed world is that they are being taken advantage of. They believe that the method under
OECD guidelines doesn’t leave enough money in those countries, so they’re developing
methodologies that don’t need information
on comparable businesses. A lot are turning
toward effectively mandated profit margins.
For example, if you make a 15 percent profit,
that’s fine. If you don’t, they’ll adjust the figures so you do. They’re basically saying they
want to grab 15 percent.”
Hungr y
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NOWHERE TO HIDE
Information sharing gained its share of the
spotlight after Swiss bank UBS gave the IRS a
disk of several thousand accounts, Reynolds
observed. “That started a major push here,
and it got other countries thinking that they
shouldn’t be so relaxed about people hiding
information. Some of this has been generated
by the U.S. with its FATCA [Foreign Account
Tax Compliance Act] legislation. And some
has been generated by foreign countries
thinking that the economy is so bad, they
need money from sources that they haven’t
tapped before, so it’s a better idea to share
information than to keep raising tax rates.”
“People are saying that the era when you
could hide income from your tax authority
is coming to an end,” he continued. “It will
probably be a few years before that’s fully
true, but if you’re advising anyone with foreign assets, they should be cautioned to fully
report them, because it will become dangerous to hide them.”
“The IRS wants to know if you have assets
anywhere in the world,” agreed Miguel Farra,
principal at Morrison, Brown, Argiz & Farra
LLC. “Form 8938 is brand-new. Even if you’re
required to file the FBAR form [ Treasury Form
90-22.1, Report of Foreign Bank and Financial Accounts] you still might have to report
on Form 8938. And the other side of FATCA
— reporting by foreign financial institutions
— comes into play in 2013.”
Under FATCA, a bank or a hedge fund has
to report information about accounts held by
U. S. taxpayers, or by foreign entities in which
U.S. taxpayers hold a substantial ownership
interest. “It’s a costly reporting requirement,”
said Farra. “A number of foreign financial institutions are not geared up for this. In some
‘They’ve
been talking
about tax
reform for a
long time.’
cases, they are telling their U.S. customers to
close their accounts.”
“It all starts with government,” said Brian Tully, head of Thomson Reuters’ ONE-SOURCE transfer pricing group. “Because of
the global recession and increasing budget
deficits, almost all countries have a need for
more revenue. One way to get that revenue
is to scale back transfer pricing, which is the
ability to transfer money and goods out of
one country into another. It can be used to
lower the tax rate by moving money, goods
or intangibles out of a high-tax jurisdiction
to a lower-tax jurisdiction. Countries have
found if they tighten up their transfer pricing
policies, they can make from $500 million to
$2 billion in revenue each year. So it’s becoming increasingly popular as a revenue source
on a worldwide basis. Countries are adding
more auditors to their revenue agencies all
over the world — the IRS is adding 900 auditors to focus on this.”
“In fact,” Tully noted, “transfer pricing
is one of the last remaining areas in which
people can do tax planning. That’s why there
is so much interest in it. But corporations
are wary, because if they do transfer pric-
ing the wrong way, they can be double- or
triple-taxed. For example, say that a com-
pany moves money from India to Thailand
to Japan to the U.S. If it’s done correctly and
within the rules, it might pay 21 percent tax.
But if it does it incorrectly, it could be taxed
on the full rate in each country and pay over
100 percent in tax. On top of that, 75 percent
of Fortune 500 companies say they are getting
audited more aggressively. That’s how gov-
ernments see this as at least a partial answer
to their revenue problems.”
