Mitigating Transfer Pricing Risk Proactively in an Uncertain Global Economy

• In Event: Concurrent Session 4.4: IFRS, Culture, and Transfer Pricing

Abstract

Transnational corporations have long considered transfer pricing as a key tax concern. If stability in transfer pricing is a necessary condition for dynamic cross-border trading, then recent financial reporting changes, updated transfer pricing guidelines, and new reporting requirements for uncertain tax positions are destabilizing influences that must be addressed by companies in order to mitigate their transfer pricing-related exposures and risk. This study reports the results of a survey of tax executives from four countries and seeks to explain what TNCs are doing in today’s volatile environment to proactively manage their transfer pricing risks, and if their actions are successful. Findings include contradictory evidence between audit risk reduction strategies recommended by tax authorities and the ability of those strategies to actually reduce corporate audit risk.
The expected relationship between APAs and audit risk reduction was not supported. There was no significance attached to APA status and the likelihood of a TP-related audit, or the outcome of that audit. This was a surprising result, given that tax authorities and consulting firms with TP expertise tout APAs as the best way to mitigate TP audit risk. At best, are APAs neutral relative to audit risk? At worst, are tax authorities using APAs as a source of confidential data to be tucked way for possible future use in non-TP audits? The latter possibility gained traction with TNC tax executives when the IRS Schedule UTP was released. Few TNC executives fully believe the IRS’s declarations that a policy of restraint is in place regarding Schedule UTP data. Only a study in hindsight of the next few years’ audits looking for connections between the audits and APA-related data, and/or Schedule UTP-related data, will answer these questions.

Authors

• Susan Carol Borkowski, LaSalle University

• Mary Anne Gaffney, Temple University