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Thursday, 1 October 2009
Firms warned against transfer pricing ruse
Companies that do business in Asia need to pay more attention to transfer pricing given that governments are introducing stricter rules in a bid to stem the flow of profits leaving their economies.
Companies that do business in Asia need to pay more attention to transfer pricing given that governments are introducing stricter rules in a bid to stem the flow of profits leaving their economies.
This is one of the key conclusions from an Ernst & Young (EY) survey looking at the way the tax authorities across 49 countries approach the issue of transfer pricing, or the prices firms charge their overseas subsidiaries for goods and services.
The prices of goods or services that had been purchased from or sold to a related company should be the same as those of goods or services bought from or sold to an unrelated company.
But companies sometimes tweak the pricing so that the unit in a high-tax country incurs higher expenses, thereby lowering the profits of the company in the higher-tax jurisdiction and lowering the tax bill.
EY Far East transfer pricing leader Luis Coronado said that amid the challenges of a global economic downturn, many governments were ‘sharpening their focus on compliance, enforcement and legislative approaches’.
The survey found that governments around the world were asking for more documentation to back up prices charged. And they plan to hit companies with higher and more frequent penalties if they suspect these firms are transferring profits overseas to low-tax areas.
Mr. Coronado warned companies to be prepared for more transfer pricing investigation.
In recent years, China, Vietnam, South Korea, Taiwan and Malaysia have issued tighter guidelines on transfer pricing.
In particular, China has now shifted to a regime where the onus is on the company to show that its pricing is at arm’s length. Businesses now have to document the basis of their pricing, allowing the tax authorities to check for signs of transfer pricing irregularity.
This could, for example, make it more difficult for Singapore-based companies with factories in China. Because of the slowdown, these factories may be showing losses, but the tax authorities could suspect they are recording higher expenses or selling at lower prices to reduce their tax bill. The tax rate in China is 25 per cent.
Mr. Coronado said: ‘Chief financial officers and tax directors must assess and manage transfer pricing risk. Companies will need to make sure they follow best practices in documenting TP decisions.’
1 comment:
Firms warned against transfer pricing ruse
By Lee Su Shyan
30 September 2009
Companies that do business in Asia need to pay more attention to transfer pricing given that governments are introducing stricter rules in a bid to stem the flow of profits leaving their economies.
This is one of the key conclusions from an Ernst & Young (EY) survey looking at the way the tax authorities across 49 countries approach the issue of transfer pricing, or the prices firms charge their overseas subsidiaries for goods and services.
The prices of goods or services that had been purchased from or sold to a related company should be the same as those of goods or services bought from or sold to an unrelated company.
But companies sometimes tweak the pricing so that the unit in a high-tax country incurs higher expenses, thereby lowering the profits of the company in the higher-tax jurisdiction and lowering the tax bill.
EY Far East transfer pricing leader Luis Coronado said that amid the challenges of a global economic downturn, many governments were ‘sharpening their focus on compliance, enforcement and legislative approaches’.
The survey found that governments around the world were asking for more documentation to back up prices charged. And they plan to hit companies with higher and more frequent penalties if they suspect these firms are transferring profits overseas to low-tax areas.
Mr. Coronado warned companies to be prepared for more transfer pricing investigation.
In recent years, China, Vietnam, South Korea, Taiwan and Malaysia have issued tighter guidelines on transfer pricing.
In particular, China has now shifted to a regime where the onus is on the company to show that its pricing is at arm’s length. Businesses now have to document the basis of their pricing, allowing the tax authorities to check for signs of transfer pricing irregularity.
This could, for example, make it more difficult for Singapore-based companies with factories in China. Because of the slowdown, these factories may be showing losses, but the tax authorities could suspect they are recording higher expenses or selling at lower prices to reduce their tax bill. The tax rate in China is 25 per cent.
Mr. Coronado said: ‘Chief financial officers and tax directors must assess and manage transfer pricing risk. Companies will need to make sure they follow best practices in documenting TP decisions.’
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