Reducing the cost of transfer pricing compliance for MNEs

Reducing the cost of transfer pricing compliance for MNEs

• 18 June 2018
• Corporate Tax
• Okkie Kellerman

Important:

This article is based on tax law for the tax year ending 28 February 2018.

Author: Okkie Kellerman

Many countries have become more focused on combating tax avoidance. As such, transfer pricing compliance has become much more burdensome due to substantial documentation requirements and multiple filing deadlines. Multinationals (“MNEs”) have to take action to control their transfer pricing risks, but the cost of doing so could substantially increase.

Before base erosion and profit shifting (“BEPS”), transfer pricing compliance was mostly local, requiring local transfer pricing documentation that focused only on the local transfer pricing position. In South Africa, MNEs would submit their corporate income tax returns, disclosing only the financial data of their locally affected transactions without the need to submit any transfer pricing policies to the South African Revenue Service (“SARS”). 

However, post-BEPS, various levels of transfer pricing documentation and filing requirements were introduced to disclose tax sensitive data, increasing the cost burden of multinationals to meet these requirement, such as:

• the country-by-country report (“CbCR”), disclosing tax data for each jurisdiction in which a MNE operates;
• the master file, providing a detailed value chain analysis of the group;
• the local file, analysing the local function performed, risks assumed and assets employed;
• local documentation requirements. In this regard, South African MNEs are also required to comply with the complex transfer pricing record-keeping requirement issued by SARS; and
• the filings of the local corporate tax return, disclosing the tax data of the local company as well as its inter-company transactions. 

All layers of documentation are to be submitted to revenue authorities, providing them with a complete picture of the MNE’s value chain. As such, it is important that these layers of documentation are aligned and consistent, all disclosing the same information. Filing of transfer pricing documentation must be synchronised across the group, increasing the work load of the MNE’s tax team and increasing its compliance costs. Imagine the increased work load of a tax team within a multinational group operating in 15 countries through 28 legal entities, with filing requirement covering 1 March to 31 December. 

This article first appeared on ensafrica.com.

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