The increased emphasis by Western revenue authorities on transfer pricing is well documented. However, the advancement of transfer pricing regimes and greater intensity of enforcement in the emerging markets pose an equally complex challenge in tax risk management.
In general, the transfer pricing framework in many emerging market jurisdictions is in its infancy, with much legislation introduced only in the last ten years. Many of these jurisdictions merely refer to the OECD principles or rely on a general anti-avoidance clause with scant detail in the published regulations or practice guidelines.
Further, some of the largest emerging economies are neither common law jurisdictions nor members of the OECD and they frequently promote norms or prescribe methods or ranges that depart from commonly understood ways of applying the OECD Guidelines.
The interpretation of the new rules can vary significantly amongst the local revenue agents with some of them emphasising revenue targets over building their audit cases on predictable principles.
Therefore, a tax manager has to provide for greater uncertainty in outcomes and potentially long-draw litigation and appeals processes. In financial services, the picture is further clouded by the need to deal with non-tax regulations such as exchange controls, banking and securities regulations and even audits by the corresponding non-tax governmental authorities when implementing transfer pricing payments.
Next, the stakeholders involved in transfer pricing are in catch-up mode. Local tax and finance professional (both external advisers and in-house staff) are also just starting to come to grips with transfer pricing and the complications arising out of its implementation.
The quality of advisers amongst the Big4 firms vary across countries and industries with local law firms in several jurisdictions proving to be much more effective than Big4 advisers. This makes it challenging to rely on a consistent central adviser throughout the emerging markets.
Perhaps the most difficult aspect of managing transfer pricing risks in the emerging markets for many Western multinational corporations is the mindset change that is necessary.
After the financial crisis, the picture going forward can become quite different once the emerging markets start making up 30%, 40% or 50% of the business instead of just 5% or 10%.
The conventional approach of centrally designing and implementing transfer pricing policies from a corporate HQ with minor adaptations to fit the regions will have to change.
There will be a proliferation of new business models that differ from that in traditional markets and increasing demand for in-house capability to create and customise audit defence documentation to meet local country requirements. In this regard, resources will have to be realigned and the risk posture vis-a-vis each region or country may need to be reassessed.
The views expressed herein are the author’s own and do not represent that of Standard Chartered Bank.
Sam Sim Tzi Yong, Transfer Pricing Manager, Standard Chartered Wholesale Bank
