Transfer pricing in the gun

Any company that ignores international transfer pricing trends does so at its peril, tax expert Jo Doolan warns.

The IRD - like the Australian Taxation Office - has begun targeting companies that are making losses or profits which appear "commercially unrealistic", and reviewing their methodology prior to launching full transfer pricing audits.

Doolan said: "Tax offices around the world are focused on maximising their tax take and if you are not prepared you are fair game for target practice. The other extreme is, 'let's just pay the maximum amount of tax'. In this case, you are guilty of ripping off your shareholders."

Multinational companies with subsidiaries in many countries have several opportunities to avoid tax. The primary technique used by multinationals to lower tax is to manipulate prices as they transfer goods and services between related branches or profit centres within the same firm. This can affect the amount of profit the multinational reports in a particular country and impact on its tax revenues.

The tax authorities recognise that transfer pricing also has a legitimate function and there has been a shift towards using a market-based system for transfer pricing of goods and services, where the firms act as if they are independent companies, instead of cost-based methods which are less economically robust.

Doolan, a senior tax partner at Ernst & Young, said some question whether transfer pricing "is the latest fad to minimise your tax return or a belts-and-braces approach to minimise your tax risk.

"The better answer is to ensuring profits are taxed based on an economic assessment of risk and return appropriate for the particular industry or activity.

"Transfer pricing is also about articulating your position and being fully prepared to defend it ... Either way, whether it is the board of directors or the management team, the new era is based on positional ignorance not being an excuse."