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 I T department keeps tolerance range for transfer pricing unchanged
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Transfer pricing future: It may largely evolve around presence of true value creators
June, 14th 2017

Rapid emergence and evolution of new technologies means that new business opportunities emerge and evaporate with unprecedented speed, warranting businesses to be agile.

Rapid emergence and evolution of new technologies means that new business opportunities emerge and evaporate with unprecedented speed, warranting businesses to be agile. Business models and value drivers are constantly showing signs of change leading to fluidity in the location and definition of the intellectual property itself in the context of different businesses. Such business model changes are not often planned for tax optimisation—these are essentially driven out of compelling business needs, resulting in an increased volume and complexity of inter-company transactions. As transfer pricing fundamentally and closely follows business, TP for the future is set to change. The strength and remuneration of hubs/principals in a centralised model will require a re-visit, even from a business perspective. This is all the more so given the scattered geo-location of true value creators, a huge surge in volume and complexity of cross-border transactions, which compel MNEs to redesign their “control-tower”.

TP with its legislative nuances remains an inexact science, combined with the significantly increased reporting requirements as part of BEPS documentation. The global value chain information will now be readily accessible by tax authorities across the world. There is a compelling need to reimagine business models and value drivers. While this makes TP a prime business risk, it is also an equal opportunity to “set things right”. With increasing tax to GDP ratios across regions, tax forms the basis for public spending and governments. Most businesses are actively revisiting their tax positions and TP still remains a sound mechanism to achieve tax efficiency while maintaining fairness.

Importance of value contribution: MNEs will increasingly realise that the one-sided traditional methods may no longer be feasible. Rather, there would be a more extensive and regular adoption of complex methodologies. This will include use of profit-split method, which requires split of revenues/profits based on relative contributions. While Value Chain Analysis (VCA) will be used to support the CbCr findings and profit0-split arrangements. Value Chain Transformation (VCT) will help in revisiting the supply chain and aligning value drivers. With dynamic and scattered nature of IPs, DEMPE functions (development, enhancement, maintenance, protection and exploitation) would be typically housed in multiple locations and would result in Cost Contribution Arrangements (CCAs)/Cost Sharing Arrangements (CSAs) being more commonly used. Expecting this trend, various tax authorities have already introduced specific regulations governing CCA/CSA, and recently also mandated VCA to be part of BEPS documentation.

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