Arcotia Hatsidimitris - International Tax Dialogue

1. INTRODUCTION – 15
Against this background, it is not surprising that both MNEs and tax administrations see transfer
pricing as one of the most significant tax risks they have to manage.
Administrative challenges
The internationally accepted arm’s length principle and the existing guidance on its application
provide a widely adopted framework for the resolution of transfer pricing issues. That framework and
the analysis of the arm’s length principle on which it is based are outside the scope of this report. But
that framework is not designed to address the administrative challenges that tax administrations face
today with respect to case selection and the auditing of transfer pricing cases. This report brings
together practical experiences of tax administrations, business and their advisers to provide insights
that are intended to help tax administrations manage their transfer pricing casework more effectively,
speed up the resolution of issues and share best practice. It reflects the diversity of situations that tax
administrations face, which are driven in part by underlying differences in the structure and size of
their economies. This report also addresses the particular difficulties that tax administrations in
developing countries have to face.
For the reasons already outlined, transfer pricing cases pose increasing challenges for tax
administrations, particularly in terms of the resources needed to manage them effectively. Similar
resource issues can arise for business and a particular challenge for revenue bodies and business alike
is that transfer pricing cases are very fact and circumstance dependent. The costs involved in a major
transfer pricing audit or enquiry can be significant as can the cost of steps taken by business to ensure
they properly manage the tax implications of transfer pricing. Furthermore, transfer pricing disputes
can last for many years, thereby increasing uncertainty for business around final tax outcomes in
multiple jurisdictions. For business, it is important to achieve early certainty and single economic
taxation. When tax rates are comparable in the jurisdictions involved, how the profits are allocated
between them is less important to business, even though it still matters to Governments. Tax
administrations are increasingly aware of the need to make best use of their limited resources and of
the need to manage their relationship with business more effectively.
Improving the management of tax risk and developing relationships between tax administrations
and large business have been two of the primary focuses of FTA work in recent years. The Study of
Tax Intermediaries (2008), Building Transparent Tax Compliance by Banks (2009), Framework for a
Voluntary Code of Conduct for Revenue Bodies and Banks (2010), and the Joint Audit Reports
(2010), are examples of that work. 3 Some aspects of those studies – such as joint audits involving
more than one tax administration, bedding out competent authorities in audit teams and engagement
between senior management of revenue bodies and the boards of large business - are particularly
relevant to the management of transfer pricing issues. The ongoing and growing importance of transfer
pricing work for tax administrations makes the practical management of transfer pricing programmes a
priority area for improvement. The FTA recognised this and decided to include a study of the
administrative aspects of transfer pricing in its 2011 work programme. The title of the study, “Dealing
Effectively with the Challenges of Transfer Pricing” makes the purpose of the work clear. The study
has deliberately focused on the internal administration of transfer pricing by tax administrations.
Closer co-operation between tax administrations by means of Advance Pricing Agreements (APA),
Mutual Agreement Procedures (MAP) and Joint Audits also has the potential to further improve the
efficiency of transfer pricing audits and enquiries. This is a significant issue in its own right, on which
the FTA has already done some work, but it may merit further study at a later date, building on the
findings of this report.
DEALING EFFECTIVELY WITH THE CHALLENGES OF TRANSFER PRICING © OECD 2012