On Thursday, January 16, 2020, KPMG Meijburg & Co will hold its annual Transfer Pricing conference in Amstelveen. This year’s conference will engage senior transfer pricing experts from 10 different KPMG Global Transfer Pricing Services practices in Europe, who will share their insights, experience and local views on the transfer pricing developments that occurred in 2019, their impact and the outlook for 2020.
Global developments in transfer pricing reflect the ongoing priorities in international tax. We continue to see proposed changes to policies and OECD proposals with significant impact on current regulations, guidelines and case law. These developments increase the complexity of the transfer pricing landscape for companies doing business in an international environment.
In this blog Jeroen Dijkman, Partner and Taco Wiertsema, Senior Tax Manager at KPMG Meijburg & Co give a preview of the most important transfer pricing developments we expect to see in Europe in 2020 and which will be discussed in more detail during our conference.
As a result of BEPS, companies must document their transfer pricing policies in a format that is quite different from previous OECD and local country guidance and which requires more in-depth information in certain areas. Companies are also increasingly required to provide this documentation to tax authorities. For the most recent years, this documentation includes a Master File and multiple Local Files and, if applicable, country-by-country (CbC) reporting and notification requirements. Updated rules on topical issues such as intangibles and intra-group services also came into effect as a result of BEPS.
In 2020, the OECD intends to undertake a review of the effectiveness of CbC reporting, including a peer review. With regard to the most recent years, we have seen a patchwork of inconsistent documentation deadlines across countries, a clear increase in transfer pricing documentation reports to be produced by companies and enhanced enforcement of these new rules by tax authorities, specifically in Eastern Europe. Our view of these developments is that the compliance burden for transfer pricing will certainly not decrease in 2020; in fact we expect that the number of transfer pricing audits will increase in various countries.
Financial transactions are one of the last missing pieces in the OECD Transfer Pricing Guidelines, but OECD guidance on the transfer pricing aspects of intra-group financing transactions is expected this year. This guidance is intended to provide more clarity for companies in audit situations.
New Disclosure Rules
In addition to a review of the CbC reporting requirements, the OECD also intends to introduce new disclosure rules in 2020. New disclosure rules include directives such as DAC 5, which focuses on beneficial ownership, and DAC 6, which provides a specific link to transfer pricing. DAC 6 requires the reporting of cross-border arrangements if they meet certain hallmarks. Specific transfer pricing hallmarks include the transfer of hard-to-value intangibles and business restructurings. According to DAC 6, a business restructuring will need to be reported if profits, before interest and taxes, fall below 50% of the projections when evaluated after three years. This implies that a mere change in financial results could constitute a business restructuring within the meaning of DAC 6. From the perspective of economic reality however, this may not necessarily be the case. The DAC 6 initiative may well lead to tax authorities being increasingly eager to receive more information from companies operating in an international environment.
The Unified Approach is the OECD’s most recent attempt to reach international consensus on transfer pricing in a digital economy environment. It appears that the OECD proposals go beyond the current arm’s length principle and will have a significant impact on companies across industries, regardless of their digital or non-digital footprint. Our view of the wide range of comments from the business community on the proposals, as presented to the OECD, is that it will be a challenging task for the OECD to come up with a final proposal in 2020 accommodating all these divergent views.
Operational Transfer Pricing
The implementation phase of the transfer pricing lifecycle, i.e. the calculation of transfer prices, their reporting and entry into the accounts and records, as well as the monitoring of this process, is continuously evolving. In our practice we see that companies mainly struggle with a lack of clear accountability or responsibility in controlling transfer pricing, with manually intensive processes and calculations that consume expensive resources, as well as an absence of automated processes that allow for real-time monitoring, adjusting and reporting of transfer pricing results. An important aspect of Operational Transfer Pricing is technology. The use of technology means that the right data can easily be made accessible and controlled. Our practical experience with technology and KPMG’s validated approach to Operational Transfer Pricing is that it not only allows companies to eliminate inefficiencies and waste, but that it also decreases risks in tax and financial audits.
Transfer Pricing Dispute Resolution
We have seen a clear increase in both the complexity and the number of transfer pricing audits across Europe. This increased scrutiny is resulting in more and more transfer pricing disputes, with countries sometimes applying divergent approaches. We expect this trend in more complex transfer pricing disputes to continue in 2020 and for the foreseeable future.
Value Chain Analysis
Another important transfer pricing issue for 2020 relates to Value Chain Analysis (VCA). In a changing business environment, companies are optimizing operating models to realize growth, capture efficiencies and control risks. As a result of these changes, it is imperative that companies assess the numerous tax implications and opportunities available to them. KPMG’s proven VCA methodology facilitates the alignment of transfer pricing with business models and objectives and assists in reducing tax risks.
During our annual Transfer Pricing conference on Thursday, January 16, 2020 in Amstelveen we will elaborate on these salient transfer pricing developments and issues. Our experts from various European KPMG Global Transfer Pricing Services practices will share their insights, experience and local views on these developments, their impact and the outlook for 2020.
If you would like more information or advice about transfer pricing, please contact Jeroen Dijkman, Taco Wiertsema or one of our other transfer pricing specialists.