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2010 Global Transfer
Pricing Survey
Addressing the challenges
of globalization
Contents
Introduction                                                     1
Executive summary                                                2
Key trends in global taxation and transfer pricing               5
Insights from the survey                                         7
Transfer pricing still dominates the tax agenda                  7
Companies are paying closer attention to documentation           9
The risk of audit is rising ...                                 11
... as the controversy management tool chest is growing         12
Transfer pricing rules are in flux                              13
Restructuring efforts and the pursuit of a more tax-efficient
supply chain are becoming more complex                          15
Conclusion                                                      18
Country-specific findings from the survey              20
Americas            Asia-Pacific        EMEIA
22 Argentina        28 Australia        34 Belgium   42 Netherlands

23 Brazil           29 China            35 Denmark   43 Norway

24 Canada           30 Japan            36 Finland   44 South Africa

25 Mexico           31 New Zealand      37 France    45 Spain

26 United States    32 South Korea      38 Germany   46 Sweden

                                        39 India     47 Switzerland

                                        40 Ireland   48 United Kingdom

                                        41 Italy

Methodology                                            49
Glossary of terms                                      52
Ernst & Young Transfer Pricing country contacts        54
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                                          Thomas Borstell
    Head of Global Accounts                               Global Director
    Transfer Pricing                                      Transfer Pricing Services




1              2010 Global Transfer Pricing Survey
Executive summary


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


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


Controversy management
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.


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


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


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




            Addressing the challenges of globalization                      2
Importance of transfer pricing               Audit experiences                                Controversy management

    Transfer pricing is one of the key tax       Transfer pricing audits are increasing           Litigation remains infrequent — but
    issues today — it is actually more           in significance, intrusiveness and               is on the rise. Meanwhile, the use of
    important today than it was two years        scope.                                           and degree of comfort with APAs are
    ago.                                                                                          increasing — while experience with
                                                                                                  new arbitration processes remains
                                                                                                  extremely limited.

    • 74% of parent respondents believe          • Two-thirds of respondents have                 • 23% of parent respondents use
      that transfer pricing documentation          undergone an audit in the 2010                   advance pricing agreements (APAs)
      is more important now than it was            Survey, compared with only 52% in                as a controversy management tool.
      two years ago.                               the 2007 Survey.
                                                                                                  • The level of satisfaction with APAs
    • 32% of all respondents identify            • 1 in 5 audit adjustments triggered a             as a controversy management tool
      transfer pricing as one of the most          material penalty, compared with 1 in             is high: 90% of those who have used
      important tax challenges facing their        25 in 2005.                                      them would do so again.
      group.
                                                 • Parent respondents report that                 • Only 18% of all respondents have
    • 74% percent of parent respondents            tax authorities requested access                 referred a transfer pricing dispute
      and 76% of subsidiary respondents            to intercompany agreements and                   to a competent authority in the last
      believe that transfer pricing will           operational personnel in 73% and 41%             three years.
      be “absolutely critical” or “very            of examinations, respectively.
      important” to their organizations                                                           • The emerging option of binding
      over the next two years.                   • Emerging markets are coming to                   arbitration has yet to be adopted by
                                                   the forefront of audit activity. The             a significant number of respondents.
                                                   number of parent respondents                     Only 2% of all respondents indicate
                                                   indicating they had undergone a                  making use of binding arbitration.
                                                   review in India increased from 6%
                                                   in 2007 to 11% in 2010, while the              • Globally, litigation remains an
                                                   number undergoing a review in China              infrequent but increasing method of
                                                   increased from 4% to 12%.                        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                        Most respondents consider the tax effects of business
    on intercompany financing transactions and service                      change on a concurrent basis.
    transactions.

    • Reviews of intercompany financing transactions increased              • A majority of respondents indicate that tax implications
      dramatically from 7% in 2007 to 42% in 2010.                            were considered in the implementation of all categories of
                                                                              business change.
    • Parent respondents indicating that their service
      transactions had undergone review increased from 55%                  • Cost reduction (78%) and information technology (IT)
      in 2007 to 66% in 2010.                                                 system implementation/improvement (74%) were the
                                                                              most common forms of business change undergone by
    • Respondents view administrative and management                          respondents in the past four years.
      service transactions and intercompany financing as
      the transactions most susceptible to dispute with tax                 • Restructurings involving intellectual property were the most
      authorities.                                                            common forms of restructurings.
    • 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.


3                                              2010 Global Transfer Pricing Survey
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 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.




                                    Addressing the challenges of globalization                                            4
Key trends in global taxation
    and transfer pricing
    The downturn in the global economy has                                 Transfer pricing has also assumed greater public prominence in
                                                                           the United States as a result of articles in the popular press and
    raised the profile of transfer pricing. Tax
                                                                           Congressional hearings on tax avoidance through “abusive”
    authorities are both upgrading and increasing                          transfer pricing.
    their staffing while at the same time placing
                                                                           In the United Kingdom, Her Majesty’s Revenue and Customs
    greater demands on corporations in areas                               (HMRC) has made a similar, coordinated transfer pricing push.
    such as documentation. Meanwhile, the OECD                             In June 2008, HMRC issued its Guidelines for the Conduct of
    is revising and updating key elements and                              Transfer Pricing Enquiries, which included the creation of a
                                                                           specialized Transfer Pricing Group, a transfer pricing review
    provisions of its transfer pricing guidance.
                                                                           board and a risk-based approach to transfer pricing enquiries.
    As a result, companies are finding they must                           In late 2010, HMRC also issued guidance to its field teams on
    work harder to define and adopt a more                                 more extensive use of penalties in transfer pricing cases.
    proactive stance in defending their transfer                           The Chinese tax authority has also adopted a targeted
    pricing policies and practices.                                        approach, designating 30% of Chinese taxpayers as key
                                                                           audit targets based on selected criteria. The criteria include
    Tax authorities are targeting intercompany transactions in             significant intercompany transactions, consecutive years
    an attempt to protect and increase their tax bases. Since the          without taxable income, reduced profit margins and low
    2007 Survey, tax authorities in key jurisdictions have taken           margins relative to industry peers. The audit initiative will rely
    steps such as significantly increasing their transfer pricing          on profit-based transfer pricing measures in preference to
    staffing, adopting more centralized approaches to managing             transactional approaches.
    transfer pricing enquiries and establishing a more strategic,          The increased focus on transfer pricing extends to smaller
    risk-based approach to prioritizing transfer pricing reviews.          markets, as well. The Australian Taxation Office is continuing
    In the United States, the Internal Revenue Service (IRS) added         to increase transfer pricing personnel and its current strategic
    1,200 employees in 2009 to deal with international issues,             transfer pricing compliance initiative is focusing on business
    with another 800 added through the end of 2010. The IRS has            restructuring, intra-group financing, mining services and
    established a goal of achieving a staff of 120 transfer pricing        changes in profitability.
    economists, the highest number in its history. As part of its          Along with increased transfer pricing staffing, tax
    transfer pricing focus, in December 2009 the IRS announced a           authorities have or will have at their disposal a number
    number of important changes. These include:                            of new or proposed disclosure requirements. These
    • The creation of a Transfer Pricing Practice.                         requirements will increase the transparency of taxpayers’
                                                                           intercompany transactions and their transfer pricing
    • The establishment of a Transfer Pricing Council to                   risks. In Latin America, many jurisdictions have mandated
      coordinate transfer pricing reviews.                                 transfer pricing disclosure forms, and others have regulations
    • The establishment of a tiered approach to targeting                  that mandate the submission of transfer pricing reports
      intercompany transactions based on their potential                   contemporaneously with the corporate tax return.
      for abuse.




5                                                2010 Global Transfer Pricing Survey
In the United States, the IRS has also increased penalties for            • A trend toward macro-level examinations, such as
failure to accurately file related-party disclosure forms (Forms            evaluating the effect of business restructurings on the
5471 and 5472). It has also introduced Schedule UTP, which                  entire value chain or evaluating the aggregate return on
requires the disclosure of detailed information on uncertain                investment under a cost-sharing arrangement
tax positions, including transfer pricing positions. At the same
                                                                          • Blurring the lines between transaction types through the
time, the IRS is developing protocols to conduct joint audits
                                                                            recognition of so-called “high-value” services
with its treaty partners.
                                                                          Even as taxpayers cope with more intense and more
Tax authorities are armed with increasingly sophisticated
                                                                          sophisticated scrutiny in developed markets, the geographic
and broad transfer pricing tools. Since the 2007 Survey,
                                                                          scope of documentation requirements continues to expand.
the IRS has issued final transfer pricing regulations for
                                                                          Since the 2007 Survey, China, France, Greece, Indonesia,
intercompany services and revised temporary regulations
                                                                          Malaysia and Vietnam have all instituted new or significantly
for cost-sharing transactions. During the same period, the
                                                                          enhanced transfer pricing requirements. Even jurisdictions
OECD issued revisions to Chapters I through III of the Transfer
                                                                          traditionally viewed as tax-favorable, such as Hong Kong and
Pricing Guidelines along with a new chapter on business
                                                                          Ireland, have introduced some level of requirement for transfer
restructurings. The Australian tax authorities issued similar
                                                                          pricing documentation.
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                 The results of our 2010 Survey reflect both
legislative developments are characterized by a number of                 the intensity and the shifting focus of transfer
common features, including:
                                                                          pricing enquiries. Taxpayers find themselves in
• Greater sophistication and flexibility in the selection of              the challenging position of documenting and
  transfer pricing methods, including the OECD’s move away                defending their transfer pricing in more and
  from a hierarchy of methods
                                                                          more countries. The transaction types they
• The adoption of a “realistic alternatives” criterion into               have to cover are increasing, and the emphasis
  the selection of best method in the US transfer pricing                 is changing. Controversy is on the rise as
  regulations and into the OECD guidelines
                                                                          increasingly well-staffed tax authorities apply
• A tendency to extend the scope of a transfer pricing                    more sophisticated and sweeping transfer pricing
  analysis beyond a single party to examine its effect on the
                                                                          tools. At the same time, fortunately, a wider array
  profit of the counterparty and/or the full value chain
                                                                          of dispute resolution channels is available and
• The OECD’s prohibition of inappropriate shifting of risk                being used.
  (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




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

                                         Addressing the challenges of globalization                                                    6
Insights from the survey
    Transfer pricing still dominates
    the tax agenda
    Ernst & Young’s 2010 Survey continues to
    demonstrate the high degree of importance                                                  30% of tax directors in parent
    tax departments assign to transfer pricing.                                                firms worldwide identify transfer
    More parent company respondents identified
    transfer pricing as the most important tax
                                                                                               pricing as their most important
    issue they face.                                                                           tax issue.
     Figure 1: Most important tax issues for tax directors (parents)                           This conclusion is supported by tax directors’ answers to
      Transfer pricing                                                                         another question. Asked how important they expect transfer
     Tax minimization                                                                          pricing to be over the next two years, 32% called it “absolutely
           Cash taxes                                                                          critical,” up from 29% in 2007. This suggests that the survey
    Value-added taxes                                                                          respondents are not complacent about their level of transfer
      Double taxation                                                                          pricing risk.
      Tax controversy
     Cash repatriation                                                                          Figure 3: Importance of transfer pricing in the next two years
    Foreign tax credits                                                                         (parents)
       Customs duties                                                                                                                                2010        2007
                          0%      5%      10%     15%     20%     25%       30%      35%        Absolutely critical                                   32%        29%

    Thirty percent of tax directors in parent firms worldwide                                   Very important                                        42%         45%
    identify transfer pricing as their most important tax issue. In                             Fairly important                                       21%        18%
    North America, transfer pricing was paramount for 21% of                                    Not very important                                      4%         5%
    respondents, but percentages were higher in other regions:
                                                                                                Not at all important                                    1%         1%
    30% in Asia-Pacific (APAC) and 33% and in Europe, Middle East,
    India and Africa (EMEIA). The percentages were highest in                                  Figure 4 summarizes the importance respondents attach to
    Italy (52%) and Denmark (60%). Figure 1 shows the eight other                              transfer pricing by industry. Tax authorities typically target
    topics that registered among many respondents as the most                                  industries with high-value, portable intellectual property
    important tax issue. Tax minimization was the only issue that                              and those that generate high margins. It is not surprising,
    rivaled transfer pricing.                                                                  therefore, that more respondents in the pharmaceutical
    Figure 2 summarizes the importance tax directors have                                      industry rank transfer pricing as their most important tax issue
    attached to transfer pricing over the last seven surveys. The                              than in any other industry. Because pharmaceutical companies
    peak of concern was in 2005 when almost 60% described it as                                typically deploy valuable intangibles in more than one tax
    “very important.” That percentage dropped in 2007 and 2010,                                jurisdiction, transfer pricing concerns typically loom large. The
    but we attribute the declines to respondents’ sense that they                              pharmaceutical industry has also been exposed to some of the
    have their transfer pricing issues under better control than                               most significant transfer pricing litigation of recent years.
    they did in 2005.                                                                          The technology and biotechnology industry, which is also
                                                                                               heavily reliant on intangible property, shows the second-
     Figure 2: Importance of transfer pricing from 1997–2010 (parents)
                                                                                               highest level of importance. Respondents in industries that
    60%
                                                                                               typically have lower levels of cross-border transfers, such as
    50%
                                                                                               transportation, telecommunications and professional services,
    40%
                                                                                               rank transfer pricing lower among their tax concerns.
    30%
    20%
    10%
     0%
             2010          2007        2005      2003      2001         1999       1997

          Very important       Fairly important Not very important    Not at all important




7                                                                    2010 Global Transfer Pricing Survey
The practice of transfer pricing is receiving
Respondents confirm ongoing                                                           greater attention
interest of tax authorities in a                                                      The increased importance MNEs attach to transfer pricing is
small number of concentrated                                                          driving increased deployment of both internal and external
                                                                                      transfer pricing resources and elevating the profile of transfer
industries. This will change in the                                                   pricing within the organization.

coming years.                                                                         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
There seems to be some legacy interest by tax authorities                             an increase in the use of software and other tools. Sixty-six
in lower-margin industries, such as the automotive and                                percent indicate that they had at least one full-time equivalent
transportation industries. There is also an inconsistency                             working on transfer pricing, up from 55% two years ago.
between increased tax authority scrutiny of financial
                                                                                      Forty-seven percent of parent respondents say that they have
transactions and the rather limited importance banks and
                                                                                      become more responsible to their boards of directors for
financial institutions place on transfer pricing. We expect this
                                                                                      transfer pricing matters and 41% say they have become more
perception to change in view of the increasingly sophisticated
                                                                                      responsible to their audit committees. As shown in Figure 5,
risk-assessment tools deployed by the tax authorities, which
                                                                                      ultimate responsibility for transfer pricing remains most often
will likely expose financial transactions to more frequent
                                                                                      with the tax department (39% of respondents), followed by
review. We also expect the focus on low-margin business to
                                                                                      the chief financial officer or parent company director. Only
erode. By contrast, we expect much more interest in businesses
                                                                                      8% of parent respondents delegate responsibility to the local
with footprints in emerging markets, such as mining, oil and
                                                                                      affiliate company.
gas and diversified industrial products.
                                                                                        Figure 5: Responsibility for transfer pricing within the organization
 Figure 4: Percentage of respondents ranking transfer pricing as                        (parents)
 their most important tax issue (parents and subsidiaries)

             Pharmaceuticals
Technology and biotechnology                                                                                             12%
          Consumer products                                                                                     3%
         Retail and wholesale
                  Automotive                                                                               8%                                    39%

Diversified industrial products
               Transportation
            Power and utilities
            Mining, oil and gas
         Professional services
                                                                                                                     38%
                    Insurance
     Media and entertainment
                    Chemicals
  Banking and capital markets
                                                                                         Tax department          Parent CFO/financial director         Delegated responsibility
         Telecommunications                                                                                                                            to local leader
                              0%   10%   20%   30%    40%    50%   60%   70%   80%       Audit committee         Other




                                                     Addressing the challenges of globalization                                                                                   8
Companies are paying closer
    attention to documentation

    The heightened scrutiny of transfer pricing,                                            Figure 7: Factors considered highly influential on transfer pricing
    the widening range of jurisdictions with                                                compliance (parents)

    documentation requirements and the                                                                     Tax audit activities

    increased level of transfer pricing disclosure                                          Tax department leading practices

    all increase a taxpayer’s transfer pricing                                                         External auditor request

    risk. That increased risk is reflected in the                                                    Audit committee request

    enhanced importance survey respondents                                                  FIN 48 requirements or equivalent

    attach to transfer pricing documentation.                                                                  Economic crisis

    Three-quarters of parent respondents in this                                                       Internal auditor request

    year’s survey consider documentation more                                                                                     0%   10%    20%   30%   40%   50%   60%   70%
    important now than two years ago.
                                                                                           As they pay closer attention to documentation, more
                                                                                           companies are adopting a global approach.
    Most parent respondents cite risk-based motivations for
    preparing documentation. Thirty-six percent identified
    risk mitigation as their primary motivation in preparing                               The number of parent respondents pursuing
    documentation, while the number of respondents citing                                  a globally coordinated transfer pricing
    audit defense as their primary motivation has more than                                documentation strategy increased from 33%
    doubled from 2007 to 20%. Fewer than 10% of respondents
                                                                                           in 2007 to 41% in 2010.
    were motivated by either financial reporting requirements or
    planning considerations.

    Figure 6: Top priority in preparing transfer pricing documentation                     Despite the potential effect of the economic downturn on
    (parents)                                                                              resources, the number of respondents that do not prepare
                                                                                           transfer pricing documentation remains low at 3%.
                 Risk mitigation/
                       reduction                                                            Figure 8: Approach to transfer pricing documentation (parents)
                   Audit defense
                                                                                                    Prepared concurrently, on a
                                                                                                      globally coordinated basis
                  Consistency of
                  documentation
                                                                                              Prepared for a single country, and
            Ability to identify tax                                                               modified to meet the needs of
          planning opportunities                                                                other jurisdictions as necessary

       Compliance with financial                                                                  Prepared on an as-necessary,
           reporting standards                                                             country-by-country basis with limited
                                                                                                coordination between countries
           Judged case by case/
    strategic or reactive decision
                                                                                                        Did not prepare transfer
                                                                                                         pricing documentation
            Minimize compliance
                          costs

           Adherence to historic                                                                          Don’t know/not stated
        practice/company policy
                                                                                                                                  0%   5%    10% 15% 20% 25% 30% 35% 40% 45%
                            Other
                                                                                                                                                                  2010      2007
                                  0%   5%   10%   15%   20%    25%   30%   35%   40%
                                                                                           Respondents generally take a regional, rather than a country-
                                                              2010     2007                specific, approach to comparables analysis. Fifty-eight percent
                                                                                           of parent respondents indicate that they use regional samples
    Consistent with their broader risk-based approach, respondents                         to one degree or another, while only 38% use local comparables
    cite tax audit activities as the most influential factor in                            for all countries (see Figure 9). Perhaps reflecting the difficulty
    determining their transfer pricing compliance (see Figure 7).                          large MNEs face in assembling local comparable data for a large
    This finding seems to suggest some degree of recognition by                            number of jurisdictions and transactions, the use of regional
    respondents of increased tax audit activity.                                           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.


9                                                                2010 Global Transfer Pricing Survey
Most respondents rely on regional comparables,                                              As for the timing of their documentation, just over half (54%) of
                                                                                            parent respondents indicate that they prepare documentation
but tax authorities increasingly require
                                                                                            contemporaneously with the filing of their corporate income tax
local comparables. More “glocalization” of                                                  return. The level of contemporaneous compliance is generally
benchmarking and comparables studies will be                                                highest in those jurisdictions with specific contemporaneous
needed to mitigate audit risk.                                                              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
 Figure 9: Approach to comparables sets (parents)                                           have contemporaneous documentation requirements at the
                                                                                            time of this survey, including Italy (29%), France (25%) and
                                                                                            Germany (14%).
                                            4%
                                                                                            The results for Canada, which has formal documentation
                                                               27%                          requirements, were anomalous, with only 22% of parent
                                                                                            respondents indicating that they prepare their transfer
                                                                                            pricing documentation contemporaneously with the filing
                         38%
                                                                                            of the tax return. Figure 11 summarizes contemporaneous
                                                                                            documentation practices by jurisdiction.

                                                         31%                                  Figure 11: Contemporaneous documentation by parent company
                                                                                              jurisdiction (parents)

                                                                                                        New Zealand
  Local comparables            Pan-regional sets, but      Pan-regional          Unknown                   Argentina
  searches for all             with exceptions for         comparables sets
  countries                    specific jurisdictional     across multiple                                    Mexico
                               requirements                jurisdictions                                        India
                                                                                                                  US
Respondents’ reliance on regional comparables is somewhat
                                                                                                         South Africa
surprising given the broadening range of local documentation                                             Netherlands
requirements. The disconnect between regulatory trends and                                                     Brazil
taxpayer practice is reflected in respondents’ audit experiences.                                                 UK
Parent respondents cite insufficient local focus on comparables as                                             Spain
the most frequent basis on which their documentation was judged                                               Ireland

inadequate upon audit (see Figure 10). Furthermore, nearly a                                                Australia
                                                                                                             Belgium
third of respondents indicate that they were required to perform
                                                                                                            Denmark
additional comparables analysis to identify local comparables. No
                                                                                                             Sweden
doubt the hot topic of debate in transfer pricing compliance over
                                                                                                         Switzerland
the next decade will be how to reconcile the need for consistency                                            Norway
and simplicity with diverging and increasingly detailed                                                      Finland
documentation requirements by tax authorities.                                                                  Italy
                                                                                                               Japan
 Figure 10: Basis on which documentation found inadequate upon                                                France
 audit (parents)                                                                                             Canada
                                                                                                            Germany
               Insufficient local
           focus — comparables                                                                                 Korea

    Reason not given/arbitrary                                                                                      0%   20%   40%   60%    80%    100%

              Incorrect method

  Insufficient demonstration of
 business case for transactions
       Insufficient local focus —
             functional analysis

   No documentation prepared

              Key facts omitted

         Not contemporaneous

Economic analysis not accepted

                                 0%   2%     4%    6%    8% 10% 12% 14% 16% 18% 20%


                                                           Addressing the challenges of globalization                                                      10
The risk of audit is rising ...

     More survey respondents report that                                           Figure 13: Jurisdiction in which transfer pricing policy was examined
     they have been subjected to a transfer                                        in the past four years (among parent companies that had undergone
                                                                                   a review since 2006)
     pricing review. Sixty-eight percent of
                                                                                                                                        2010      2007
     parent respondents indicate their transfer                                    US                                                    36%       31%
     pricing policy had been examined by tax                                       Germany                                               32%       31%
                                                                                   France                                                21%       27%
     authorities, up from 52% in the 2007 Survey                                   UK                                                    19%       27%
     (see Figure 12).                                                              Canada                                                18%       23%
                                                                                   Italy                                                 13%       15%
      Figure 12: Incidence of transfer pricing review (parents)                    China                                                 12%        4%
                                                                                   Australia                                             11%       11%
      80%
                                                                                   India                                                 11%        6%
      70%                                                                          Japan                                                  9%       12%
      60%

      50%
                                                                                  Increasing numbers of respondents are experiencing
      40%                                                                         the pains of transfer pricing audits globally. However,
      30%                                                                         the range of countries in which audits occur is shifting,
      20%
                                                                                  with mature transfer pricing jurisdictions apparently
                                                                                  scaling back and emerging jurisdictions scaling up
      10%
                                                                                  dramatically. The increasing pressure on governments
       0%                                                                         to raise revenues and the dedication of additional
                        2010                            2007
                                                                                  transfer pricing enforcement resources are likely to lead
     Respondents’ risk of audit varied depending upon their                       to reinvigorated scrutiny in all markets.
     intercompany transactions and their size. The establishment
     of limited risk distribution structures, material intercompany
     license transactions and company size are all positively                     The survey results indicate a substantial increase since 2005
     correlated with the risk of transfer pricing review. These                   in the percentage of adjustments resulting in penalties, as
     findings are consistent with the application by tax authorities              summarized in Figure 14.
     of a risk-based approach to transfer pricing reviews. The
     larger the company, the larger the transfer pricing adjustment                Figure 14: Percentage of adjustments resulting in penalties (parents)
     it typically yields. Intercompany licensing transactions and                   20%
     limited-risk distribution arrangements, which frequently
     involve the conversion of a full-fledged distributor with existing             15%
     marketing intangibles, are typically susceptible to larger
     adjustments than tangible goods transactions or even service                   10%
     transactions.
     While the level of transfer pricing reviews has increased                        5%
     globally, the jurisdictions where those reviews have occurred
     have shifted since 2007. The United States and other mature                      0%
     transfer pricing jurisdictions head the list of jurisdictions                                2010                2007                 2005

     where respondents had experienced a review, but China and                    According to the survey results, there is now a 1 in 5 chance of
     India have shown a significant increase in audit activity. The               suffering a material penalty compared with a one in 25 chance
     countries showing a reduction in activity are generally those                in 2005. The increasing imposition of penalties is a function of
     that face resource constraints, focus on a smaller number of                 increasing tax authority resources, as well as tax authorities’
     high-profile cases or are revising their risk-based approach                 obvious need to raise more revenues. We expect the trend
     to case selection. Figure 13 summarizes the geographic                       toward increased penalties to continue.
     distribution of the reviews experienced by respondents.
                                                                                  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.


11                                                      2010 Global Transfer Pricing Survey
… as the controversy
management tool chest
is growing
A taxpayer’s options for resolving transfer                                     Seventy-nine percent of parents report that they are generally
                                                                                satisfied with the APA process. However, many remain
pricing disputes after domestic appeals
                                                                                unconvinced (or unaware) of the benefits of APAs: fewer than
were historically limited to three: APAs,                                       half (47%) of parent respondents not already using APAs say
competent authority relief (through the                                         they would consider using them in the future.
Mutual Agreement Procedure provision of the                                     The 2010 Survey results show slightly increased reliance
relevant treaty) and litigation. Since the 2007                                 on the competent authority process, reversing a moderate
Survey, binding arbitration has arisen as an                                    trend from 2003 through 2007 of decreased reliance. While
                                                                                the trend from 2003 to 2007 may have resulted from the
additional mechanism.
                                                                                increased availability of APAs and a general desire by taxpayers
Published statistics from many tax authorities indicate record                  to manage controversy risk prospectively, the 2010 results
levels of APA applications overall. For example, the IRS is at a                may reflect a global trend toward increased bilateral and
four-year high while the Canada Revenue Agency is at an all-                    multilateral transfer pricing dispute resolution. Figure 16
time high.                                                                      summarizes the pattern over time.

The reported use of APAs in our transfer pricing surveys has                      Figure 16: Respondents referring a matter to competent
nearly doubled since the inception of APA programs around the                     authority in the previous four years
time of our 1999 Survey. The growth in APA use is a function                                                        2010    2007         2005        2003
of the increasing availability of APA programs and increasing                     Parents                           18%      17%          18%          18%
realization of the value of APAs as dispute resolution tools. We                  Subsidiaries                       17%     11%          13%          16%
predict that the use of APAs to resolve disputes and to reduce
FIN 48 reserves will continue to trend upward. MNEs should                      The newly available binding arbitration process has yet to be
consider the strategic use of APAs in both of these areas.                      used by a significant number of respondents, with only 14
                                                                                parent respondents (2%) indicating they have pursued this
Although only 23% of parent respondents indicate using                          option in a transfer pricing controversy.
APAs as a controversy management tool, the level of                             Litigation of transfer pricing disputes remains infrequent, with
satisfaction with the APA process among users is high.                          only 11% of parent respondents overall pursuing this avenue.
Ninety percent indicate that they would seek an APA in                          The only jurisdiction with significant litigation activity is India,
the future.                                                                     where 50% of respondents have relied on litigation for the
                                                                                resolution of transfer pricing disputes.
The range of jurisdictions in which parent respondents have                     As summarized in Figure 17, competent authority is the
sought APAs is wide (29 countries). But the principal APA                       preferred method among parent respondents for resolving
jurisdictions remain those with well-developed transfer pricing                 transfer pricing disputes.
regimes, such as the United States, the United Kingdom, the
Netherlands, Australia and Japan (see Figure 15).                                 Figure 17: Preferred methods of resolving transfer pricing disputes
                                                                                  (parents)
 Figure 15: Top five jurisdictions in which an APA has been used
                                                                                  40%
 (parents)
 45%                                                                              35%

                               2010     2007       2005     2003      2001        30%
 40%
                                                                                  25%
 35%
                                                                                  20%
 30%
                                                                                  15%

 25%                                                                              10%

 20%                                                                               5%

                                                                                   0%
 15%                                                                                    Competent authority   APA           Litigation    Binding arbitration

 10%

  5%

  0%
         US         UK        Netherlands       Australia     Japan
                                               Addressing the challenges of globalization                                                                 12
Transfer pricing rules are in flux


     Regulations and resulting practice are in
                                                                            Despite the increased importance of profit-based
     flux all over the world. For example, during
                                                                            methods in the OECD and in many countries in
     the last three years, both the OECD and the
                                                                            transfer pricing audits, we still observe a minority
     US Treasury issued significant new transfer
                                                                            of respondents using profit-based methods.
     pricing regulations or guidelines. Similarly, a                        We predict that regulatory shifts will result in
     wide range of countries — from Germany and                             a dramatic increase in the use of profit-based
     Italy to Russia and China — have delivered or                          methods as corroborative, or sometimes primary,
     are at least in the process of implementing                            transfer pricing methods. We have already begun
     significant revisions to their rules and                               to see this trend in high-profile controversy
     practices.                                                             cases. Survey readers should begin to consider
                                                                            the importance of profit-based methods in their
     In the United States, the 2008 temporary cost-sharing                  transfer pricing planning and documentation.
     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         Figure 18: Transfer pricing methods used in establishing tangible
     level of sophistication, as evidenced by their sheer length in          goods pricing (parents)
     comparison to the original regulations they superseded.                 Cost plus                                                          30%
                                                                             Benchmark of third-party prices (CUP method)                       27%
     The OECD’s revisions to Chapters I through III of the Transfer
     Pricing Guidelines signal a shift from the OECD’s historically          Profit-based method (CPM/TNMM)                                     23%
     strong preference for transactional methods toward accepting            RPM (resale price method)/resale minus                             12%
     profit-based methods. The OECD’s Restructuring Chapter                  Profit split                                                        3%
     signals a new scrutiny of business restructuring transactions.
                                                                             Other                                                               6%
     Our survey responses reflect broad awareness of such
     developments. Sixty-two percent of parent respondents                   Figure 19: Transfer pricing methods used in establishing service
     headquartered in OECD countries indicate awareness of the               transaction pricing (parents)
     OECD discussion draft, Transfer Pricing Aspects of Business             Cost plus                                                          52%
     Restructuring. Awareness of the US cost-sharing regulations             Benchmark of third-party prices (CUP method)                       21%
     was high among US parent respondents at 66%. However,
                                                                             TNMM                                                               11%
     the figure is a mere 28% among parent respondents with
                                                                             At cost                                                            7%
     headquarters in other jurisdictions. Fifty-three percent of
     parent respondents indicate that they were altering their               Value-based service fees                                            2%
     transfer pricing policies in response to regulatory changes.            Other                                                               6%

     Based on our survey, taxpayers are not yet moving toward
                                                                             Figure 20: Transfer pricing methods used in establishing intangible
     profit-based methods — even though such methods are
                                                                             goods licensing (parents)
     increasingly preferred by tax authorities. Parent respondents
                                                                             Third-party benchmark agreement between the                        22%
     instead continue to show a strong preference for transactional
                                                                             company and an unrelated party
     methods in establishing pricing for tangible goods, services and
                                                                             Third-party benchmark agreement between two parties                21%
     intangible goods (see Figures 18 through 20).
                                                                             unrelated to the company
                                                                             Profit-based method (CPM/TNMM)                                     21%
                                                                             Profit split                                                       9%
                                                                             Other                                                              25%
                                                                             Don’t know/not stated                                               3%




13                                                2010 Global Transfer Pricing Survey
While MNEs may not be consistent with current regulatory                                Figure 22: Most significant transfer pricing examination (parents)
trends in their choice of transfer pricing methods, their
prioritization of transactions susceptible to review is                                                         Services
aligned with the audit priorities established by the major tax                                       Transfer of sales of
authorities. Parent respondents ranked services, financing                                               tangible goods
                                                                                                          Intercompany
and intangible transactions as among the most susceptible to                                                   financing
transfer pricing review (see Figure 21).                                                 License of intangible property

                                                                                                          Cost sharing/
                                                                                          cost contribution agreements
Parent respondents ranked services, financing                                                         Other/don’t know
and intangible transactions as among the most                                                     Imputed or increased
                                                                                         compensation/indemnification
susceptible to transfer pricing review, and all                                          payments for business change
                                                                                                                         0% 10% 20% 30% 40% 50% 60% 70%
categories of transactions as more susceptible to
review than in 2007.                                                                                                                           2010    2007
                                                                                      Parent respondents also report more intrusive transfer pricing
                                                                                      examinations with requests for all categories of documents
 Figure 21: Transactions most susceptible to review by tax authorities                and sources above their 2007 levels. In line with the
 (parents)                                                                            increased scrutiny of the commercial basis for intercompany
                                                                                      pricing policies, tax authority requests for access to company
        Administrative or managerial services
                                                                                      operational personnel increased significantly from 36% in
                       Intercompany financing                                          2007 to 49% in the current survey. As tax authorities have
                            Technical services                                        expanded their analyses beyond a single party to examine
                License of intangible property                                        effects on the profit of the counterparty, requests for foreign
   Cost sharing/cost contribution agreements                                          affiliate financial records and management accounts have
  Transfer or sales of finished goods for resale
                                                                                      increased. Intercompany agreements (not covered in the
                                                                                      2007 Survey) stood out as an almost universal request in
       Commission for sales/transfer of goods
        Sales of raw materials or components                                          transfer pricing audits.
                   between group companies
         Imputed or increased compensation/
indemnification payments for business change                                             Figure 23: Requests made in transfer pricing audit (parents)
      Treatment of stock-based compensation
                                                                                                            Financial records of
                                         None                                                                  foreign affiliates
                                         Other                                                              Access to company
                                                                                                          operational personnel
                        Don’t know/not stated                                                     Access to the company’s EDP
                                                                                               system/other computer records
                                              0% 10% 20% 30% 40% 50% 60% 70%
                                                                                                 Internal documents relating to
                                                                                                   tax input on business change
                                                                   2010    2007
                                                                                                                Correspondence
                                                                                                                with tax advisors
Tax authority examinations reflect the same                                          Other company documents not specifically
increased focus on service and intangible transactions,                                  prepared for transfer pricing purposes
                                                                                       Disclosure and specification of uncertain
with intercompany loans also showing a striking increase in                                  tax positions in statutory accounts
scrutiny. As shown in Figure 22, 42% of respondents that                                                          None of these
underwent a transfer pricing examination report that their
                                                                                                                                0%   10% 20% 30%   40% 50%   60%
intercompany financing was examined, up from only 7% in the
2007 Survey. Sixty-six percent report that their intercompany                                                                                      2010      2007
service transactions were examined, up from 55% in the
2007 Survey.




                                                     Addressing the challenges of globalization                                                               14
Restructuring efforts and the pursuit
 of a more tax-efficient supply chain are
 becoming more complex
     At precisely the time when companies need                               Figure 24: Categories of business change implemented since
     to achieve greater efficiency in all areas                              2006 (parents)
                                                                                                        Total   EMEIA    Americas   APAC
     — business and tax alike — a number of
                                                                             Cost reduction               78%      81%        85%         57%
     transfer pricing developments are presenting
                                                                             IT system                    74%      74%        83%         60%
     challenges to MNEs who are restructuring                                implementation/
     their businesses. The IRS, for example,                                 improvement
     released a Coordinated Issue Paper on buy-                              Entry into new               71%      75%        76%         51%
                                                                             markets/new product
     ins related to cost-sharing arrangements and                            lines
     revised cost-sharing regulations. Similarly,                            Post-merger                  63%      67%        66%         46%
     the OECD has issued its Chapter IX focusing                             integration/acquisitions

     on business restructurings. At the same time,                           Supply chain                 50%      53%        49%         39%
                                                                             optimization
     the tax effects of business restructurings are
                                                                             Centralization               50%      55%        50%         30%
     receiving increased scrutiny from the press                             of business or
     and the US Congress.                                                    management functions
                                                                             Outsourcing or off-          26%      26%        35%         14%
                                                                             shoring of supply chain
     Our 2010 Survey queried respondents in detail on their                  functions
     business change and restructuring activities. These questions
     covered the nature of their business restructurings, the
     consideration of tax implications in business restructurings and       Cost reduction and IT system implementation or improvement
     the timing of restructuring activity.                                  projects were the most common categories of business change.
                                                                            The focus on cost reduction is unsurprising in the context of
     Figure 24 presents the types of business changes undertaken            the current economic downturn. However, the prevalence of IT
     by parent respondents since 2006 in total and by region.               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.




15                                                2010 Global Transfer Pricing Survey
Geographically, there are significant differences in business                              In spite of greater complexity and added documentation
restructuring activity, with the Americas and EMEIA showing                                requirements, companies are still pursuing a wide array
higher levels of all categories of business change than the                                of business restructuring, streamlining and supply chain
APAC region. The rapidly changing global business footprint                                reconfiguration due to business necessity. Figure 26
and its eastward shift suggest that the APAC region will require                           summarizes the business restructurings that parent
intense focus by tax departments in the coming years, as MNEs                              respondents have implemented, both in total and by region.
play catch-up to accomplish in the APAC region what they
already have in EMEIA and the Americas.                                                      Figure 26: Business restructurings implemented or being pursued
                                                                                             (parents)
  Figure 25: Centralization of management and supply chain                                                              Total    EMEIA    Americas   APAC
  optimization by industry (parents)
                                                                                             Centralized intangible        42%     47%         40%      30%
                                                                                             property ownership
          Telecommunication
                                                                                             and management
             Pharmaceuticals                                                                 Cost-sharing/buy-in           39%     46%         35%      24%
                                                                                             agreements
         Retail and wholesale
                                                                                             Intangible property           36%     37%         40%      26%
     Media and entertainment                                                                 planning

               Transportation                                                                Shared service centers        35%      35%        47%      15%
                                                                                             in low-cost jurisdiction
  Banking and capital markets
                                                                                             Contract R&D                  34%     36%         35%      25%
                    Insurance                                                                Centralized or regional       34%     36%         38%      20%
                                                                                             procurement company
                  Automotive
                                                                                             Limited-risk                  30%     33%         34%      12%
          Consumer products                                                                  distributor(s)
            Mining, oil and gas                                                              Global or regional            28%     27%         33%      25%
                                                                                             principal or central
Technology and biotechnology                                                                 entrepreneur

Diversified industrial products                                                              Limited-risk service          27%     30%         31%      15%
                                                                                             providers
                    Chemicals
                                                                                             Single regional sales/        27%     28%         29%      21%
         Professional services                                                               marketing entity
                                                                                             Limited-risk                  23%     25%         28%       9%
            Power and utilities
                                                                                             manufacturing
                              0%    10%     20%    30%     40%     50%   60%   70%   80%


                                   Centralization of business or    Supply chain
                                   management functions             optimization


                                                                                           The survey reveals that a significant portion of
There is little regional variation in the relative ranking of
business change projects. However, there are marked, if not                                business restructurings involve intangibles. Given
surprising, variations in the absolute levels of business change                           governments’ focus on intangibles — both incentives
implementation. The EMEIA and Americas regions return                                      to retain or attract to their jurisdictions (e.g., the
very similar levels of activity, while APAC respondents, where                             recent UK announcements on the patent box) and
companies tend to be less mature, indicate significantly lower                             enforcement efforts — we can expect continued
levels of business change.
                                                                                           examination, controversy and litigation activity in
                                                                                           this area.




                                                          Addressing the challenges of globalization                                                        16
Given the significant role intangibles play in today’s businesses,               Figure 28 summarizes the timing of parent respondents’
 restructurings focused on intangibles, including contract                        business restructuring activities.
 R&D, are particularly prevalent. Less popular are centralized
                                                                                   Figure 28: Timing of business restructuring activities (parents)
 procurement and global or regional principal structures.
 Limited-risk manufacturing structures are the least common                                                   2005–     2001–      Prior to   Don’t
 forms of restructuring. This is not surprising because many                                                  2010      2004       2000       know
 companies have already established manufacturing in low-cost,                     Centralized intangible        37%        18%        36%            9%
 tax-competitive jurisdictions, employ “manufacturing-lite”                        property ownership
                                                                                   and management
 business models or are not involved in manufacturing activities
 at all.                                                                           Centralized or regional       59%        13%        24%            5%
                                                                                   procurement company
 Again, the survey shows that respondents are generally aware                      Contract R&D                  53%        16%        25%            6%
 of the need to consider tax implications in the planning and
                                                                                   Cost-sharing/buy-in           52%        21%        22%            5%
 implementation of business restructuring projects. Figure 27                      agreements
 summarizes the consideration of tax implications in the various
                                                                                   Global or regional            44%        24%        25%            7%
 categories of business change.
                                                                                   principal or central
                                                                                   entrepreneur
     Figure 27: Consideration of tax implications in business change
     (parents)                                                                     Intangible property            51%       15%        25%            9%
                                                                                   planning
                                       Yes         No          Don’t
                                                               know/               Limited-risk service          52%        20%        22%            7%
                                                               not stated          providers
     Post-merger integration                 91%         7%              1%        Limited-risk                  43%        27%        27%            3%
                                                                                   distribution
     Outsourcing or off-shoring of           81%        17%              2%
     supply chain functions                                                        Limited-risk                  43%        24%        28%            5%
                                                                                   manufacturing
     Entry into new market/new               79%        19%              2%
     product lines                                                                 Shared service centers        66%        22%         9%            3%
                                                                                   in low-cost jurisdiction
     Centralization of business or           77%        22%              1%
     management functions                                                          Single regional sales/        47%        21%        26%            6%
                                                                                   marketing entity
     Supply chain optimization               75%        23%              2%
     IT systems implementation/              66%        32%              2%       The 2005–2010 period saw an upsurge in restructuring
     improvement                                                                  activity after a lull in the 2001–2004 period. Centralization
     Cost reduction                          62%        37%              1%       of intangible property management, in particular, rebounded
     Other forms of business change          62%        23%             15%       during the 2005–2010 period with a 36 percentage point
                                                                                  increase. Other forms of planning related to intangible
 Awareness of the need to consider tax implications is foremost                   property, such as contract R&D, also increased in the 2005–
 in post-merger integration (91%) and outsourcing/off-shoring                     2010 period. Regional procurement companies, which were
 (81%) projects.                                                                  among the least popular forms of planning before 2005, have
                                                                                  moved into first place among planning structures.




17                                                      2010 Global Transfer Pricing Survey
Conclusion

In the many years that Ernst & Young has                                  The recession and regulatory uncertainty seem to have
                                                                          stemmed the amount of business-driven tax planning in the
been tracking transfer pricing trends, a
                                                                          last few years. We see great challenges for MNEs in dealing
number of core themes have emerged.                                       with the transfer pricing implications of business change. Given
However, this year’s survey uncovered some                                the significant increase in regulations over the past few years,
subtle differences and new areas for MNEs                                 more complex transfer pricing designs are warranted to meet
                                                                          the new high standards set by the OECD and regulators in
to consider.
                                                                          countries like Germany.

MNEs must take a more proactive approach to transfer pricing.             Taxpayers should reinforce their transfer pricing
The risk of challenge by the authorities continues to increase.           documentation for intercompany services, licensing and
In their quest for more revenue, tax authorities have become              financing transactions. This year’s survey highlights the
better at auditing, with higher hit rates for adjustments and             increasing scrutiny these transactions are receiving from tax
higher levels of penalties. Documentation needs to cover more             authorities. Unlike tangible goods transactions, where cost
countries — witness China — and more types of transactions,               of production or acquisition can serve as a reference point
as evidenced by the dramatically increased scrutiny of                    for value, the valuation of services, licensing and financing
loans and financial transactions. Despite the need to cover               transactions is more complex, being primarily related to value
more countries, globally consistent documentation will need               rather than costs. As a result, tax authorities recognize that
to accommodate the increasing trend toward “glocalization.”               these transactions have the potential to generate significant
Two of the most commonly cited reasons for suffering audit                adjustments. At the same time, it is our experience that
adjustments were insufficient local tailoring of facts and                transfer pricing documentation for services and intercompany
insufficient local benchmarking of prices or margins. Risk-               financing transactions often lags behind documentation of
based assessments will need to find a balance between global              tangible goods transactions. Taxpayers should ensure that their
strategy and local detail, a change we are seeing first-hand with         services, intangibles and financing policies and documentation
some of our largest, most sophisticated transfer pricing clients.         can withstand the rigors of the current transfer pricing
                                                                          environment.
MNEs should pursue a more proactive and extensive use of
APAs where there is reliable availability. MNEs will see more             Ernst & Young’s Global Transfer Pricing group expects the
instances of potential double taxation. Instead of waiting to             next few years to be dynamic and exciting as MNEs exercise
react to controversy, MNEs will need to plan for it by learning           greater rigor to meet increasingly onerous requirements. In
how to handle domestic appeals, competent authority                       the end, we anticipate more movement across the gamut of
proceedings, alternative dispute resolution mechanisms and                transfer pricing areas — preparing documentation to meet
APAs. Although more than a third of respondents prefer                    compliance requirements and mitigate penalties; managing
the Mutual Agreement Procedure for dispute resolution, we                 audits, resolving disputes and eliminating double taxation; and
anticipate more litigation where it is not an option.                     harnessing business change in a tax-efficient manner. We look
                                                                          forward to sharing the journey with readers of this survey!




                                        Addressing the challenges of globalization                                                     18
19   2010 Global Transfer Pricing Survey
Country-specific findings
from the survey
The 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              Australia                          Belgium                   Brazil         Canada




  China                Denmark                             Finland                  France         Germany




   India                Ireland                              Italy                  Japan           Mexico




Netherlands          New Zealand                           Norway                South Africa    South Korea




  Spain                Sweden                           Switzerland             United Kingdom   United States




                                   Addressing the challenges of globalization                                    20
Americas




21         2010 Global Transfer Pricing Survey
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2010 Global Transfer Pricing Survey

  • 1. 2010 Global Transfer Pricing Survey Addressing the challenges of globalization
  • 2. Contents Introduction 1 Executive summary 2 Key trends in global taxation and transfer pricing 5 Insights from the survey 7 Transfer pricing still dominates the tax agenda 7 Companies are paying closer attention to documentation 9 The risk of audit is rising ... 11 ... as the controversy management tool chest is growing 12 Transfer pricing rules are in flux 13 Restructuring efforts and the pursuit of a more tax-efficient supply chain are becoming more complex 15 Conclusion 18
  • 3. Country-specific findings from the survey 20 Americas Asia-Pacific EMEIA 22 Argentina 28 Australia 34 Belgium 42 Netherlands 23 Brazil 29 China 35 Denmark 43 Norway 24 Canada 30 Japan 36 Finland 44 South Africa 25 Mexico 31 New Zealand 37 France 45 Spain 26 United States 32 South Korea 38 Germany 46 Sweden 39 India 47 Switzerland 40 Ireland 48 United Kingdom 41 Italy Methodology 49 Glossary of terms 52 Ernst & Young Transfer Pricing country contacts 54
  • 4. 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 Thomas Borstell Head of Global Accounts Global Director Transfer Pricing Transfer Pricing Services 1 2010 Global Transfer Pricing Survey
  • 5. Executive summary Importance of transfer pricing Transfer pricing is one of the key tax issues today — it is actually more important today than it was two years ago. Audit experiences Transfer pricing audits are increasing in significance, intrusiveness and scope. Controversy management 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. Trends in transfer pricing issues and approaches Enforcement actions are placing greater emphasis on intercompany financing transactions and service transactions. Taxpayer approaches Taxpayers are taking a more coordinated and globalized approach to transfer pricing documentation. Tax and efficient supply chain management Tax considerations relating to business restructuring are expected to become more important in the coming years. Addressing the challenges of globalization 2
  • 6. Importance of transfer pricing Audit experiences Controversy management Transfer pricing is one of the key tax Transfer pricing audits are increasing Litigation remains infrequent — but issues today — it is actually more in significance, intrusiveness and is on the rise. Meanwhile, the use of important today than it was two years scope. and degree of comfort with APAs are ago. increasing — while experience with new arbitration processes remains extremely limited. • 74% of parent respondents believe • Two-thirds of respondents have • 23% of parent respondents use that transfer pricing documentation undergone an audit in the 2010 advance pricing agreements (APAs) is more important now than it was Survey, compared with only 52% in as a controversy management tool. two years ago. the 2007 Survey. • The level of satisfaction with APAs • 32% of all respondents identify • 1 in 5 audit adjustments triggered a as a controversy management tool transfer pricing as one of the most material penalty, compared with 1 in is high: 90% of those who have used important tax challenges facing their 25 in 2005. them would do so again. group. • Parent respondents report that • Only 18% of all respondents have • 74% percent of parent respondents tax authorities requested access referred a transfer pricing dispute and 76% of subsidiary respondents to intercompany agreements and to a competent authority in the last believe that transfer pricing will operational personnel in 73% and 41% three years. be “absolutely critical” or “very of examinations, respectively. important” to their organizations • The emerging option of binding over the next two years. • Emerging markets are coming to arbitration has yet to be adopted by the forefront of audit activity. The a significant number of respondents. number of parent respondents Only 2% of all respondents indicate indicating they had undergone a making use of binding arbitration. review in India increased from 6% in 2007 to 11% in 2010, while the • Globally, litigation remains an number undergoing a review in China infrequent but increasing method of increased from 4% to 12%. 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 Most respondents consider the tax effects of business on intercompany financing transactions and service change on a concurrent basis. transactions. • Reviews of intercompany financing transactions increased • A majority of respondents indicate that tax implications dramatically from 7% in 2007 to 42% in 2010. were considered in the implementation of all categories of business change. • Parent respondents indicating that their service transactions had undergone review increased from 55% • Cost reduction (78%) and information technology (IT) in 2007 to 66% in 2010. system implementation/improvement (74%) were the most common forms of business change undergone by • Respondents view administrative and management respondents in the past four years. service transactions and intercompany financing as the transactions most susceptible to dispute with tax • Restructurings involving intellectual property were the most authorities. common forms of restructurings. • 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. 3 2010 Global Transfer Pricing Survey
  • 7. 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 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. Addressing the challenges of globalization 4
  • 8. Key trends in global taxation and transfer pricing The downturn in the global economy has Transfer pricing has also assumed greater public prominence in the United States as a result of articles in the popular press and raised the profile of transfer pricing. Tax Congressional hearings on tax avoidance through “abusive” authorities are both upgrading and increasing transfer pricing. their staffing while at the same time placing In the United Kingdom, Her Majesty’s Revenue and Customs greater demands on corporations in areas (HMRC) has made a similar, coordinated transfer pricing push. such as documentation. Meanwhile, the OECD In June 2008, HMRC issued its Guidelines for the Conduct of is revising and updating key elements and Transfer Pricing Enquiries, which included the creation of a specialized Transfer Pricing Group, a transfer pricing review provisions of its transfer pricing guidance. board and a risk-based approach to transfer pricing enquiries. As a result, companies are finding they must In late 2010, HMRC also issued guidance to its field teams on work harder to define and adopt a more more extensive use of penalties in transfer pricing cases. proactive stance in defending their transfer The Chinese tax authority has also adopted a targeted pricing policies and practices. approach, designating 30% of Chinese taxpayers as key audit targets based on selected criteria. The criteria include Tax authorities are targeting intercompany transactions in significant intercompany transactions, consecutive years an attempt to protect and increase their tax bases. Since the without taxable income, reduced profit margins and low 2007 Survey, tax authorities in key jurisdictions have taken margins relative to industry peers. The audit initiative will rely steps such as significantly increasing their transfer pricing on profit-based transfer pricing measures in preference to staffing, adopting more centralized approaches to managing transactional approaches. transfer pricing enquiries and establishing a more strategic, The increased focus on transfer pricing extends to smaller risk-based approach to prioritizing transfer pricing reviews. markets, as well. The Australian Taxation Office is continuing In the United States, the Internal Revenue Service (IRS) added to increase transfer pricing personnel and its current strategic 1,200 employees in 2009 to deal with international issues, transfer pricing compliance initiative is focusing on business with another 800 added through the end of 2010. The IRS has restructuring, intra-group financing, mining services and established a goal of achieving a staff of 120 transfer pricing changes in profitability. economists, the highest number in its history. As part of its Along with increased transfer pricing staffing, tax transfer pricing focus, in December 2009 the IRS announced a authorities have or will have at their disposal a number number of important changes. These include: of new or proposed disclosure requirements. These • The creation of a Transfer Pricing Practice. requirements will increase the transparency of taxpayers’ intercompany transactions and their transfer pricing • The establishment of a Transfer Pricing Council to risks. In Latin America, many jurisdictions have mandated coordinate transfer pricing reviews. transfer pricing disclosure forms, and others have regulations • The establishment of a tiered approach to targeting that mandate the submission of transfer pricing reports intercompany transactions based on their potential contemporaneously with the corporate tax return. for abuse. 5 2010 Global Transfer Pricing Survey
  • 9. In the United States, the IRS has also increased penalties for • A trend toward macro-level examinations, such as failure to accurately file related-party disclosure forms (Forms evaluating the effect of business restructurings on the 5471 and 5472). It has also introduced Schedule UTP, which entire value chain or evaluating the aggregate return on requires the disclosure of detailed information on uncertain investment under a cost-sharing arrangement tax positions, including transfer pricing positions. At the same • Blurring the lines between transaction types through the time, the IRS is developing protocols to conduct joint audits recognition of so-called “high-value” services with its treaty partners. Even as taxpayers cope with more intense and more Tax authorities are armed with increasingly sophisticated sophisticated scrutiny in developed markets, the geographic and broad transfer pricing tools. Since the 2007 Survey, scope of documentation requirements continues to expand. the IRS has issued final transfer pricing regulations for Since the 2007 Survey, China, France, Greece, Indonesia, intercompany services and revised temporary regulations Malaysia and Vietnam have all instituted new or significantly for cost-sharing transactions. During the same period, the enhanced transfer pricing requirements. Even jurisdictions OECD issued revisions to Chapters I through III of the Transfer traditionally viewed as tax-favorable, such as Hong Kong and Pricing Guidelines along with a new chapter on business Ireland, have introduced some level of requirement for transfer restructurings. The Australian tax authorities issued similar pricing documentation. 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 The results of our 2010 Survey reflect both legislative developments are characterized by a number of the intensity and the shifting focus of transfer common features, including: pricing enquiries. Taxpayers find themselves in • Greater sophistication and flexibility in the selection of the challenging position of documenting and transfer pricing methods, including the OECD’s move away defending their transfer pricing in more and from a hierarchy of methods more countries. The transaction types they • The adoption of a “realistic alternatives” criterion into have to cover are increasing, and the emphasis the selection of best method in the US transfer pricing is changing. Controversy is on the rise as regulations and into the OECD guidelines increasingly well-staffed tax authorities apply • A tendency to extend the scope of a transfer pricing more sophisticated and sweeping transfer pricing analysis beyond a single party to examine its effect on the tools. At the same time, fortunately, a wider array profit of the counterparty and/or the full value chain of dispute resolution channels is available and • The OECD’s prohibition of inappropriate shifting of risk being used. (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 More countries, more issues, More countries, more issues, more more tax authority aggression tax authority aggression, and more and more disputes — that’s why disputes – that’s why transfer pricing is the number one international tax issue transfer pricing is a leading for respondents. international tax issue for respondents. Addressing the challenges of globalization 6
  • 10. Insights from the survey Transfer pricing still dominates the tax agenda Ernst & Young’s 2010 Survey continues to demonstrate the high degree of importance 30% of tax directors in parent tax departments assign to transfer pricing. firms worldwide identify transfer More parent company respondents identified transfer pricing as the most important tax pricing as their most important issue they face. tax issue. Figure 1: Most important tax issues for tax directors (parents) This conclusion is supported by tax directors’ answers to Transfer pricing another question. Asked how important they expect transfer Tax minimization pricing to be over the next two years, 32% called it “absolutely Cash taxes critical,” up from 29% in 2007. This suggests that the survey Value-added taxes respondents are not complacent about their level of transfer Double taxation pricing risk. Tax controversy Cash repatriation Figure 3: Importance of transfer pricing in the next two years Foreign tax credits (parents) Customs duties 2010 2007 0% 5% 10% 15% 20% 25% 30% 35% Absolutely critical 32% 29% Thirty percent of tax directors in parent firms worldwide Very important 42% 45% identify transfer pricing as their most important tax issue. In Fairly important 21% 18% North America, transfer pricing was paramount for 21% of Not very important 4% 5% respondents, but percentages were higher in other regions: Not at all important 1% 1% 30% in Asia-Pacific (APAC) and 33% and in Europe, Middle East, India and Africa (EMEIA). The percentages were highest in Figure 4 summarizes the importance respondents attach to Italy (52%) and Denmark (60%). Figure 1 shows the eight other transfer pricing by industry. Tax authorities typically target topics that registered among many respondents as the most industries with high-value, portable intellectual property important tax issue. Tax minimization was the only issue that and those that generate high margins. It is not surprising, rivaled transfer pricing. therefore, that more respondents in the pharmaceutical Figure 2 summarizes the importance tax directors have industry rank transfer pricing as their most important tax issue attached to transfer pricing over the last seven surveys. The than in any other industry. Because pharmaceutical companies peak of concern was in 2005 when almost 60% described it as typically deploy valuable intangibles in more than one tax “very important.” That percentage dropped in 2007 and 2010, jurisdiction, transfer pricing concerns typically loom large. The but we attribute the declines to respondents’ sense that they pharmaceutical industry has also been exposed to some of the have their transfer pricing issues under better control than most significant transfer pricing litigation of recent years. they did in 2005. The technology and biotechnology industry, which is also heavily reliant on intangible property, shows the second- Figure 2: Importance of transfer pricing from 1997–2010 (parents) highest level of importance. Respondents in industries that 60% typically have lower levels of cross-border transfers, such as 50% transportation, telecommunications and professional services, 40% rank transfer pricing lower among their tax concerns. 30% 20% 10% 0% 2010 2007 2005 2003 2001 1999 1997 Very important Fairly important Not very important Not at all important 7 2010 Global Transfer Pricing Survey
  • 11. The practice of transfer pricing is receiving Respondents confirm ongoing greater attention interest of tax authorities in a The increased importance MNEs attach to transfer pricing is small number of concentrated driving increased deployment of both internal and external transfer pricing resources and elevating the profile of transfer industries. This will change in the pricing within the organization. coming years. 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 There seems to be some legacy interest by tax authorities an increase in the use of software and other tools. Sixty-six in lower-margin industries, such as the automotive and percent indicate that they had at least one full-time equivalent transportation industries. There is also an inconsistency working on transfer pricing, up from 55% two years ago. between increased tax authority scrutiny of financial Forty-seven percent of parent respondents say that they have transactions and the rather limited importance banks and become more responsible to their boards of directors for financial institutions place on transfer pricing. We expect this transfer pricing matters and 41% say they have become more perception to change in view of the increasingly sophisticated responsible to their audit committees. As shown in Figure 5, risk-assessment tools deployed by the tax authorities, which ultimate responsibility for transfer pricing remains most often will likely expose financial transactions to more frequent with the tax department (39% of respondents), followed by review. We also expect the focus on low-margin business to the chief financial officer or parent company director. Only erode. By contrast, we expect much more interest in businesses 8% of parent respondents delegate responsibility to the local with footprints in emerging markets, such as mining, oil and affiliate company. gas and diversified industrial products. Figure 5: Responsibility for transfer pricing within the organization Figure 4: Percentage of respondents ranking transfer pricing as (parents) their most important tax issue (parents and subsidiaries) Pharmaceuticals Technology and biotechnology 12% Consumer products 3% Retail and wholesale Automotive 8% 39% Diversified industrial products Transportation Power and utilities Mining, oil and gas Professional services 38% Insurance Media and entertainment Chemicals Banking and capital markets Tax department Parent CFO/financial director Delegated responsibility Telecommunications to local leader 0% 10% 20% 30% 40% 50% 60% 70% 80% Audit committee Other Addressing the challenges of globalization 8
  • 12. Companies are paying closer attention to documentation The heightened scrutiny of transfer pricing, Figure 7: Factors considered highly influential on transfer pricing the widening range of jurisdictions with compliance (parents) documentation requirements and the Tax audit activities increased level of transfer pricing disclosure Tax department leading practices all increase a taxpayer’s transfer pricing External auditor request risk. That increased risk is reflected in the Audit committee request enhanced importance survey respondents FIN 48 requirements or equivalent attach to transfer pricing documentation. Economic crisis Three-quarters of parent respondents in this Internal auditor request year’s survey consider documentation more 0% 10% 20% 30% 40% 50% 60% 70% important now than two years ago. As they pay closer attention to documentation, more companies are adopting a global approach. Most parent respondents cite risk-based motivations for preparing documentation. Thirty-six percent identified risk mitigation as their primary motivation in preparing The number of parent respondents pursuing documentation, while the number of respondents citing a globally coordinated transfer pricing audit defense as their primary motivation has more than documentation strategy increased from 33% doubled from 2007 to 20%. Fewer than 10% of respondents in 2007 to 41% in 2010. were motivated by either financial reporting requirements or planning considerations. Figure 6: Top priority in preparing transfer pricing documentation Despite the potential effect of the economic downturn on (parents) resources, the number of respondents that do not prepare transfer pricing documentation remains low at 3%. Risk mitigation/ reduction Figure 8: Approach to transfer pricing documentation (parents) Audit defense Prepared concurrently, on a globally coordinated basis Consistency of documentation Prepared for a single country, and Ability to identify tax modified to meet the needs of planning opportunities other jurisdictions as necessary Compliance with financial Prepared on an as-necessary, reporting standards country-by-country basis with limited coordination between countries Judged case by case/ strategic or reactive decision Did not prepare transfer pricing documentation Minimize compliance costs Adherence to historic Don’t know/not stated practice/company policy 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Other 2010 2007 0% 5% 10% 15% 20% 25% 30% 35% 40% Respondents generally take a regional, rather than a country- 2010 2007 specific, approach to comparables analysis. Fifty-eight percent of parent respondents indicate that they use regional samples Consistent with their broader risk-based approach, respondents to one degree or another, while only 38% use local comparables cite tax audit activities as the most influential factor in for all countries (see Figure 9). Perhaps reflecting the difficulty determining their transfer pricing compliance (see Figure 7). large MNEs face in assembling local comparable data for a large This finding seems to suggest some degree of recognition by number of jurisdictions and transactions, the use of regional respondents of increased tax audit activity. 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. 9 2010 Global Transfer Pricing Survey
  • 13. Most respondents rely on regional comparables, As for the timing of their documentation, just over half (54%) of parent respondents indicate that they prepare documentation but tax authorities increasingly require contemporaneously with the filing of their corporate income tax local comparables. More “glocalization” of return. The level of contemporaneous compliance is generally benchmarking and comparables studies will be highest in those jurisdictions with specific contemporaneous needed to mitigate audit risk. 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 Figure 9: Approach to comparables sets (parents) have contemporaneous documentation requirements at the time of this survey, including Italy (29%), France (25%) and Germany (14%). 4% The results for Canada, which has formal documentation 27% requirements, were anomalous, with only 22% of parent respondents indicating that they prepare their transfer pricing documentation contemporaneously with the filing 38% of the tax return. Figure 11 summarizes contemporaneous documentation practices by jurisdiction. 31% Figure 11: Contemporaneous documentation by parent company jurisdiction (parents) New Zealand Local comparables Pan-regional sets, but Pan-regional Unknown Argentina searches for all with exceptions for comparables sets countries specific jurisdictional across multiple Mexico requirements jurisdictions India US Respondents’ reliance on regional comparables is somewhat South Africa surprising given the broadening range of local documentation Netherlands requirements. The disconnect between regulatory trends and Brazil taxpayer practice is reflected in respondents’ audit experiences. UK Parent respondents cite insufficient local focus on comparables as Spain the most frequent basis on which their documentation was judged Ireland inadequate upon audit (see Figure 10). Furthermore, nearly a Australia Belgium third of respondents indicate that they were required to perform Denmark additional comparables analysis to identify local comparables. No Sweden doubt the hot topic of debate in transfer pricing compliance over Switzerland the next decade will be how to reconcile the need for consistency Norway and simplicity with diverging and increasingly detailed Finland documentation requirements by tax authorities. Italy Japan Figure 10: Basis on which documentation found inadequate upon France audit (parents) Canada Germany Insufficient local focus — comparables Korea Reason not given/arbitrary 0% 20% 40% 60% 80% 100% Incorrect method Insufficient demonstration of business case for transactions Insufficient local focus — functional analysis No documentation prepared Key facts omitted Not contemporaneous Economic analysis not accepted 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Addressing the challenges of globalization 10
  • 14. The risk of audit is rising ... More survey respondents report that Figure 13: Jurisdiction in which transfer pricing policy was examined they have been subjected to a transfer in the past four years (among parent companies that had undergone a review since 2006) pricing review. Sixty-eight percent of 2010 2007 parent respondents indicate their transfer US 36% 31% pricing policy had been examined by tax Germany 32% 31% France 21% 27% authorities, up from 52% in the 2007 Survey UK 19% 27% (see Figure 12). Canada 18% 23% Italy 13% 15% Figure 12: Incidence of transfer pricing review (parents) China 12% 4% Australia 11% 11% 80% India 11% 6% 70% Japan 9% 12% 60% 50% Increasing numbers of respondents are experiencing 40% the pains of transfer pricing audits globally. However, 30% the range of countries in which audits occur is shifting, 20% with mature transfer pricing jurisdictions apparently scaling back and emerging jurisdictions scaling up 10% dramatically. The increasing pressure on governments 0% to raise revenues and the dedication of additional 2010 2007 transfer pricing enforcement resources are likely to lead Respondents’ risk of audit varied depending upon their to reinvigorated scrutiny in all markets. intercompany transactions and their size. The establishment of limited risk distribution structures, material intercompany license transactions and company size are all positively The survey results indicate a substantial increase since 2005 correlated with the risk of transfer pricing review. These in the percentage of adjustments resulting in penalties, as findings are consistent with the application by tax authorities summarized in Figure 14. of a risk-based approach to transfer pricing reviews. The larger the company, the larger the transfer pricing adjustment Figure 14: Percentage of adjustments resulting in penalties (parents) it typically yields. Intercompany licensing transactions and 20% limited-risk distribution arrangements, which frequently involve the conversion of a full-fledged distributor with existing 15% marketing intangibles, are typically susceptible to larger adjustments than tangible goods transactions or even service 10% transactions. While the level of transfer pricing reviews has increased 5% globally, the jurisdictions where those reviews have occurred have shifted since 2007. The United States and other mature 0% transfer pricing jurisdictions head the list of jurisdictions 2010 2007 2005 where respondents had experienced a review, but China and According to the survey results, there is now a 1 in 5 chance of India have shown a significant increase in audit activity. The suffering a material penalty compared with a one in 25 chance countries showing a reduction in activity are generally those in 2005. The increasing imposition of penalties is a function of that face resource constraints, focus on a smaller number of increasing tax authority resources, as well as tax authorities’ high-profile cases or are revising their risk-based approach obvious need to raise more revenues. We expect the trend to case selection. Figure 13 summarizes the geographic toward increased penalties to continue. distribution of the reviews experienced by respondents. 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. 11 2010 Global Transfer Pricing Survey
  • 15. … as the controversy management tool chest is growing A taxpayer’s options for resolving transfer Seventy-nine percent of parents report that they are generally satisfied with the APA process. However, many remain pricing disputes after domestic appeals unconvinced (or unaware) of the benefits of APAs: fewer than were historically limited to three: APAs, half (47%) of parent respondents not already using APAs say competent authority relief (through the they would consider using them in the future. Mutual Agreement Procedure provision of the The 2010 Survey results show slightly increased reliance relevant treaty) and litigation. Since the 2007 on the competent authority process, reversing a moderate Survey, binding arbitration has arisen as an trend from 2003 through 2007 of decreased reliance. While the trend from 2003 to 2007 may have resulted from the additional mechanism. increased availability of APAs and a general desire by taxpayers Published statistics from many tax authorities indicate record to manage controversy risk prospectively, the 2010 results levels of APA applications overall. For example, the IRS is at a may reflect a global trend toward increased bilateral and four-year high while the Canada Revenue Agency is at an all- multilateral transfer pricing dispute resolution. Figure 16 time high. summarizes the pattern over time. The reported use of APAs in our transfer pricing surveys has Figure 16: Respondents referring a matter to competent nearly doubled since the inception of APA programs around the authority in the previous four years time of our 1999 Survey. The growth in APA use is a function 2010 2007 2005 2003 of the increasing availability of APA programs and increasing Parents 18% 17% 18% 18% realization of the value of APAs as dispute resolution tools. We Subsidiaries 17% 11% 13% 16% predict that the use of APAs to resolve disputes and to reduce FIN 48 reserves will continue to trend upward. MNEs should The newly available binding arbitration process has yet to be consider the strategic use of APAs in both of these areas. used by a significant number of respondents, with only 14 parent respondents (2%) indicating they have pursued this Although only 23% of parent respondents indicate using option in a transfer pricing controversy. APAs as a controversy management tool, the level of Litigation of transfer pricing disputes remains infrequent, with satisfaction with the APA process among users is high. only 11% of parent respondents overall pursuing this avenue. Ninety percent indicate that they would seek an APA in The only jurisdiction with significant litigation activity is India, the future. where 50% of respondents have relied on litigation for the resolution of transfer pricing disputes. The range of jurisdictions in which parent respondents have As summarized in Figure 17, competent authority is the sought APAs is wide (29 countries). But the principal APA preferred method among parent respondents for resolving jurisdictions remain those with well-developed transfer pricing transfer pricing disputes. regimes, such as the United States, the United Kingdom, the Netherlands, Australia and Japan (see Figure 15). Figure 17: Preferred methods of resolving transfer pricing disputes (parents) Figure 15: Top five jurisdictions in which an APA has been used 40% (parents) 45% 35% 2010 2007 2005 2003 2001 30% 40% 25% 35% 20% 30% 15% 25% 10% 20% 5% 0% 15% Competent authority APA Litigation Binding arbitration 10% 5% 0% US UK Netherlands Australia Japan Addressing the challenges of globalization 12
  • 16. Transfer pricing rules are in flux Regulations and resulting practice are in Despite the increased importance of profit-based flux all over the world. For example, during methods in the OECD and in many countries in the last three years, both the OECD and the transfer pricing audits, we still observe a minority US Treasury issued significant new transfer of respondents using profit-based methods. pricing regulations or guidelines. Similarly, a We predict that regulatory shifts will result in wide range of countries — from Germany and a dramatic increase in the use of profit-based Italy to Russia and China — have delivered or methods as corroborative, or sometimes primary, are at least in the process of implementing transfer pricing methods. We have already begun significant revisions to their rules and to see this trend in high-profile controversy practices. cases. Survey readers should begin to consider the importance of profit-based methods in their In the United States, the 2008 temporary cost-sharing transfer pricing planning and documentation. 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 Figure 18: Transfer pricing methods used in establishing tangible level of sophistication, as evidenced by their sheer length in goods pricing (parents) comparison to the original regulations they superseded. Cost plus 30% Benchmark of third-party prices (CUP method) 27% The OECD’s revisions to Chapters I through III of the Transfer Pricing Guidelines signal a shift from the OECD’s historically Profit-based method (CPM/TNMM) 23% strong preference for transactional methods toward accepting RPM (resale price method)/resale minus 12% profit-based methods. The OECD’s Restructuring Chapter Profit split 3% signals a new scrutiny of business restructuring transactions. Other 6% Our survey responses reflect broad awareness of such developments. Sixty-two percent of parent respondents Figure 19: Transfer pricing methods used in establishing service headquartered in OECD countries indicate awareness of the transaction pricing (parents) OECD discussion draft, Transfer Pricing Aspects of Business Cost plus 52% Restructuring. Awareness of the US cost-sharing regulations Benchmark of third-party prices (CUP method) 21% was high among US parent respondents at 66%. However, TNMM 11% the figure is a mere 28% among parent respondents with At cost 7% headquarters in other jurisdictions. Fifty-three percent of parent respondents indicate that they were altering their Value-based service fees 2% transfer pricing policies in response to regulatory changes. Other 6% Based on our survey, taxpayers are not yet moving toward Figure 20: Transfer pricing methods used in establishing intangible profit-based methods — even though such methods are goods licensing (parents) increasingly preferred by tax authorities. Parent respondents Third-party benchmark agreement between the 22% instead continue to show a strong preference for transactional company and an unrelated party methods in establishing pricing for tangible goods, services and Third-party benchmark agreement between two parties 21% intangible goods (see Figures 18 through 20). unrelated to the company Profit-based method (CPM/TNMM) 21% Profit split 9% Other 25% Don’t know/not stated 3% 13 2010 Global Transfer Pricing Survey
  • 17. While MNEs may not be consistent with current regulatory Figure 22: Most significant transfer pricing examination (parents) trends in their choice of transfer pricing methods, their prioritization of transactions susceptible to review is Services aligned with the audit priorities established by the major tax Transfer of sales of authorities. Parent respondents ranked services, financing tangible goods Intercompany and intangible transactions as among the most susceptible to financing transfer pricing review (see Figure 21). License of intangible property Cost sharing/ cost contribution agreements Parent respondents ranked services, financing Other/don’t know and intangible transactions as among the most Imputed or increased compensation/indemnification susceptible to transfer pricing review, and all payments for business change 0% 10% 20% 30% 40% 50% 60% 70% categories of transactions as more susceptible to review than in 2007. 2010 2007 Parent respondents also report more intrusive transfer pricing examinations with requests for all categories of documents Figure 21: Transactions most susceptible to review by tax authorities and sources above their 2007 levels. In line with the (parents) increased scrutiny of the commercial basis for intercompany pricing policies, tax authority requests for access to company Administrative or managerial services operational personnel increased significantly from 36% in Intercompany financing 2007 to 49% in the current survey. As tax authorities have Technical services expanded their analyses beyond a single party to examine License of intangible property effects on the profit of the counterparty, requests for foreign Cost sharing/cost contribution agreements affiliate financial records and management accounts have Transfer or sales of finished goods for resale increased. Intercompany agreements (not covered in the 2007 Survey) stood out as an almost universal request in Commission for sales/transfer of goods Sales of raw materials or components transfer pricing audits. between group companies Imputed or increased compensation/ indemnification payments for business change Figure 23: Requests made in transfer pricing audit (parents) Treatment of stock-based compensation Financial records of None foreign affiliates Other Access to company operational personnel Don’t know/not stated Access to the company’s EDP system/other computer records 0% 10% 20% 30% 40% 50% 60% 70% Internal documents relating to tax input on business change 2010 2007 Correspondence with tax advisors Tax authority examinations reflect the same Other company documents not specifically increased focus on service and intangible transactions, prepared for transfer pricing purposes Disclosure and specification of uncertain with intercompany loans also showing a striking increase in tax positions in statutory accounts scrutiny. As shown in Figure 22, 42% of respondents that None of these underwent a transfer pricing examination report that their 0% 10% 20% 30% 40% 50% 60% intercompany financing was examined, up from only 7% in the 2007 Survey. Sixty-six percent report that their intercompany 2010 2007 service transactions were examined, up from 55% in the 2007 Survey. Addressing the challenges of globalization 14
  • 18. Restructuring efforts and the pursuit of a more tax-efficient supply chain are becoming more complex At precisely the time when companies need Figure 24: Categories of business change implemented since to achieve greater efficiency in all areas 2006 (parents) Total EMEIA Americas APAC — business and tax alike — a number of Cost reduction 78% 81% 85% 57% transfer pricing developments are presenting IT system 74% 74% 83% 60% challenges to MNEs who are restructuring implementation/ their businesses. The IRS, for example, improvement released a Coordinated Issue Paper on buy- Entry into new 71% 75% 76% 51% markets/new product ins related to cost-sharing arrangements and lines revised cost-sharing regulations. Similarly, Post-merger 63% 67% 66% 46% the OECD has issued its Chapter IX focusing integration/acquisitions on business restructurings. At the same time, Supply chain 50% 53% 49% 39% optimization the tax effects of business restructurings are Centralization 50% 55% 50% 30% receiving increased scrutiny from the press of business or and the US Congress. management functions Outsourcing or off- 26% 26% 35% 14% shoring of supply chain Our 2010 Survey queried respondents in detail on their functions business change and restructuring activities. These questions covered the nature of their business restructurings, the consideration of tax implications in business restructurings and Cost reduction and IT system implementation or improvement the timing of restructuring activity. projects were the most common categories of business change. The focus on cost reduction is unsurprising in the context of Figure 24 presents the types of business changes undertaken the current economic downturn. However, the prevalence of IT by parent respondents since 2006 in total and by region. 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. 15 2010 Global Transfer Pricing Survey
  • 19. Geographically, there are significant differences in business In spite of greater complexity and added documentation restructuring activity, with the Americas and EMEIA showing requirements, companies are still pursuing a wide array higher levels of all categories of business change than the of business restructuring, streamlining and supply chain APAC region. The rapidly changing global business footprint reconfiguration due to business necessity. Figure 26 and its eastward shift suggest that the APAC region will require summarizes the business restructurings that parent intense focus by tax departments in the coming years, as MNEs respondents have implemented, both in total and by region. play catch-up to accomplish in the APAC region what they already have in EMEIA and the Americas. Figure 26: Business restructurings implemented or being pursued (parents) Figure 25: Centralization of management and supply chain Total EMEIA Americas APAC optimization by industry (parents) Centralized intangible 42% 47% 40% 30% property ownership Telecommunication and management Pharmaceuticals Cost-sharing/buy-in 39% 46% 35% 24% agreements Retail and wholesale Intangible property 36% 37% 40% 26% Media and entertainment planning Transportation Shared service centers 35% 35% 47% 15% in low-cost jurisdiction Banking and capital markets Contract R&D 34% 36% 35% 25% Insurance Centralized or regional 34% 36% 38% 20% procurement company Automotive Limited-risk 30% 33% 34% 12% Consumer products distributor(s) Mining, oil and gas Global or regional 28% 27% 33% 25% principal or central Technology and biotechnology entrepreneur Diversified industrial products Limited-risk service 27% 30% 31% 15% providers Chemicals Single regional sales/ 27% 28% 29% 21% Professional services marketing entity Limited-risk 23% 25% 28% 9% Power and utilities manufacturing 0% 10% 20% 30% 40% 50% 60% 70% 80% Centralization of business or Supply chain management functions optimization The survey reveals that a significant portion of There is little regional variation in the relative ranking of business change projects. However, there are marked, if not business restructurings involve intangibles. Given surprising, variations in the absolute levels of business change governments’ focus on intangibles — both incentives implementation. The EMEIA and Americas regions return to retain or attract to their jurisdictions (e.g., the very similar levels of activity, while APAC respondents, where recent UK announcements on the patent box) and companies tend to be less mature, indicate significantly lower enforcement efforts — we can expect continued levels of business change. examination, controversy and litigation activity in this area. Addressing the challenges of globalization 16
  • 20. Given the significant role intangibles play in today’s businesses, Figure 28 summarizes the timing of parent respondents’ restructurings focused on intangibles, including contract business restructuring activities. R&D, are particularly prevalent. Less popular are centralized Figure 28: Timing of business restructuring activities (parents) procurement and global or regional principal structures. Limited-risk manufacturing structures are the least common 2005– 2001– Prior to Don’t forms of restructuring. This is not surprising because many 2010 2004 2000 know companies have already established manufacturing in low-cost, Centralized intangible 37% 18% 36% 9% tax-competitive jurisdictions, employ “manufacturing-lite” property ownership and management business models or are not involved in manufacturing activities at all. Centralized or regional 59% 13% 24% 5% procurement company Again, the survey shows that respondents are generally aware Contract R&D 53% 16% 25% 6% of the need to consider tax implications in the planning and Cost-sharing/buy-in 52% 21% 22% 5% implementation of business restructuring projects. Figure 27 agreements summarizes the consideration of tax implications in the various Global or regional 44% 24% 25% 7% categories of business change. principal or central entrepreneur Figure 27: Consideration of tax implications in business change (parents) Intangible property 51% 15% 25% 9% planning Yes No Don’t know/ Limited-risk service 52% 20% 22% 7% not stated providers Post-merger integration 91% 7% 1% Limited-risk 43% 27% 27% 3% distribution Outsourcing or off-shoring of 81% 17% 2% supply chain functions Limited-risk 43% 24% 28% 5% manufacturing Entry into new market/new 79% 19% 2% product lines Shared service centers 66% 22% 9% 3% in low-cost jurisdiction Centralization of business or 77% 22% 1% management functions Single regional sales/ 47% 21% 26% 6% marketing entity Supply chain optimization 75% 23% 2% IT systems implementation/ 66% 32% 2% The 2005–2010 period saw an upsurge in restructuring improvement activity after a lull in the 2001–2004 period. Centralization Cost reduction 62% 37% 1% of intangible property management, in particular, rebounded Other forms of business change 62% 23% 15% during the 2005–2010 period with a 36 percentage point increase. Other forms of planning related to intangible Awareness of the need to consider tax implications is foremost property, such as contract R&D, also increased in the 2005– in post-merger integration (91%) and outsourcing/off-shoring 2010 period. Regional procurement companies, which were (81%) projects. among the least popular forms of planning before 2005, have moved into first place among planning structures. 17 2010 Global Transfer Pricing Survey
  • 21. Conclusion In the many years that Ernst & Young has The recession and regulatory uncertainty seem to have stemmed the amount of business-driven tax planning in the been tracking transfer pricing trends, a last few years. We see great challenges for MNEs in dealing number of core themes have emerged. with the transfer pricing implications of business change. Given However, this year’s survey uncovered some the significant increase in regulations over the past few years, subtle differences and new areas for MNEs more complex transfer pricing designs are warranted to meet the new high standards set by the OECD and regulators in to consider. countries like Germany. MNEs must take a more proactive approach to transfer pricing. Taxpayers should reinforce their transfer pricing The risk of challenge by the authorities continues to increase. documentation for intercompany services, licensing and In their quest for more revenue, tax authorities have become financing transactions. This year’s survey highlights the better at auditing, with higher hit rates for adjustments and increasing scrutiny these transactions are receiving from tax higher levels of penalties. Documentation needs to cover more authorities. Unlike tangible goods transactions, where cost countries — witness China — and more types of transactions, of production or acquisition can serve as a reference point as evidenced by the dramatically increased scrutiny of for value, the valuation of services, licensing and financing loans and financial transactions. Despite the need to cover transactions is more complex, being primarily related to value more countries, globally consistent documentation will need rather than costs. As a result, tax authorities recognize that to accommodate the increasing trend toward “glocalization.” these transactions have the potential to generate significant Two of the most commonly cited reasons for suffering audit adjustments. At the same time, it is our experience that adjustments were insufficient local tailoring of facts and transfer pricing documentation for services and intercompany insufficient local benchmarking of prices or margins. Risk- financing transactions often lags behind documentation of based assessments will need to find a balance between global tangible goods transactions. Taxpayers should ensure that their strategy and local detail, a change we are seeing first-hand with services, intangibles and financing policies and documentation some of our largest, most sophisticated transfer pricing clients. can withstand the rigors of the current transfer pricing environment. MNEs should pursue a more proactive and extensive use of APAs where there is reliable availability. MNEs will see more Ernst & Young’s Global Transfer Pricing group expects the instances of potential double taxation. Instead of waiting to next few years to be dynamic and exciting as MNEs exercise react to controversy, MNEs will need to plan for it by learning greater rigor to meet increasingly onerous requirements. In how to handle domestic appeals, competent authority the end, we anticipate more movement across the gamut of proceedings, alternative dispute resolution mechanisms and transfer pricing areas — preparing documentation to meet APAs. Although more than a third of respondents prefer compliance requirements and mitigate penalties; managing the Mutual Agreement Procedure for dispute resolution, we audits, resolving disputes and eliminating double taxation; and anticipate more litigation where it is not an option. harnessing business change in a tax-efficient manner. We look forward to sharing the journey with readers of this survey! Addressing the challenges of globalization 18
  • 22. 19 2010 Global Transfer Pricing Survey
  • 23. Country-specific findings from the survey The 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 Australia Belgium Brazil Canada China Denmark Finland France Germany India Ireland Italy Japan Mexico Netherlands New Zealand Norway South Africa South Korea Spain Sweden Switzerland United Kingdom United States Addressing the challenges of globalization 20
  • 24. Americas 21 2010 Global Transfer Pricing Survey