The outbreak of Covid-19 has resulted in the closure of many sectors of the economy. Governments around the world have had to act fast to support companies and employees through various schemes to attempt to avoid the immediate collapse of many businesses. While it is unclear at this point whether the global economy will suffer a short-term shock and V-shaped recovery, or a deep recession, what is clear is that governments have added massively to national debts to support companies and citizens.
In the UK, the government is paying 80% of an employee’s salary, up to £2,500 per month, in an attempt to prevent large-scale redundancies in sectors deeply hit by the virus. The take-up of the Coronavirus Job Retention Scheme has been greater than politicians imagined, with more than 25% of the British workforce estimated to have been placed on furlough. The scheme is estimated to be costing £14bn per month, with an extension to October just announced. According to the Office of Budget Responsibility, the direct effect of government actions in relation to the pandemic could end up costing the UK taxpayer more than £100bn –. almost the equivalent of this year’s National Health Service budget.
What does this unprecedented use of taxpayers’ money mean for the companies that have been supported?
Walking the tightrope around transfer pricing
Once we emerge from this crisis, governments could expect payback in the form of higher taxes from businesses and/or individuals. Similarly, there may be further scrutiny of taxes that are due, which could lead to more aggressive collection by tax authorities. In a nutshell, this means scrutiny of transfer pricing policies, and their correct application, is likely.
As finance professionals know, typically, transfer prices are priced based on the going market rate for that good or service. The price at which cross-border subsidiaries trade impacts the distribution of profit across those jurisdictions, and therefore the tax that is payable in the jurisdiction where each subsidiary is based.
In recent years (prior to 2015), some companies have adopted corporate tax planning strategies to ‘shift’ profits from higher-tax jurisdictions to lower-tax jurisdictions, thus ‘eroding’ the ‘tax-base’ of the higher-tax jurisdictions.
Large multinationals such as Google and Amazon have been criticised in the British press over the past decade for not paying what is considered a fair level of tax. With so much coverage in the popular press, ‘anti-avoidance’ legislation, commonly referred to as the ‘Google Tax,’ has been enacted by certain jurisdictions.
Now, in a period where many multinationals are beneficiaries of taxpayers’ support, any suspicion that these companies are trying to minimise their tax liabilities in the UK would be hugely damaging to their reputations. It could also warrant high financial penalties for the organisation in question.
Companies are therefore going to have to walk a tightrope of:
- a) Balancing the need to service their own debts, which have increased due to the pandemic
- b) Meeting the fair tax obligations of multiple governments
- c) Fulfilling their fiduciary duty to their shareholders, to whom they ultimately owe responsibility, in order to act in their best interests
What should companies think about?
Tax authorities are likely to be more aggressive in the future to ensure they collect the taxes they believe they are owed. The transfer pricing policies of multinationals will likely come under the spotlight, as authorities want to understand the policies and calculations behind the numbers booked. Businesses need to be prepared to defend their transfer pricing policies and demonstrate that their calculations have been performed accurately and applied consistently across the organisation.
To achieve this, a number of transfer pricing basics need applying quickly:
- 1. Get out of Excel – or at the very least, have standardisation in Excel
Many finance teams use Excel to manage their transfer pricing policies and calculations, which is incredibly time-intensive and prone to error. Individuals often create custom calculations that cannot be transferred or easily standardised, which is critical to forming a consistent narrative. All team members need to be using the same tools in a collaborative way, with automation being at the core of the technology being used. Excel allows too much room for error, de-standardisation and siloed working, meaning defending a transfer pricing policy becomes exponentially more difficult.
- 2. Check the policies first, not the figures
It sounds silly to say ‘don’t focus on the figures,’ but with the right technology in place, team members can focus their attention to checking their transfer pricing policies are correct, that they are supported by the right documentation, and that the profit distribution across the organisation feels right. This is a better approach than worrying about individual adjustments between entity A and entity B. It’s easy to get bogged down in the detail, but there is no point until you’ve surveyed the bigger picture.
- 3. Consider where data science can help you
Tax authorities create models (using their own data scientists) to benchmark companies on their tax returns, in order to identify outliers. It’s likely they will take a similar approach with transfer pricing policies – and companies (especially outliers) need to be prepared to defend their position. Providing tools to help your team become data scientists means you can better analyse and understand the data, making it easier to provide tax authorities with what they need should you come under investigation.
This is especially pertinent because under the Base Erosion and Profit Shifting (BEPS) initiative, companies already submit a breakdown of the financial and tax position of the group by country, as well as tax return data. Tax authorities – in the future –could take this data and mix it with previous tax returns submitted by any company. With a data model that blends BEPS data with tax return data, they will be able to identify organisations taking a more aggressive stance around their global tax strategy, especially when looking at historical precedent.
- 4. Move into a dedicated system
Ideally, get out of Excel and into a dedicated, documented, quality assured (QA’d) system that automates the laborious parts of the transfer pricing process. These systems accurately collect and organise transfer pricing data, identify gaps in targeted profitability, and enable you to make corrections before closing the books. That way, you can use the time you save to take a step back so you can see the wider picture.
While many things remain uncertain, one certainty is the increasing of national government debts. As a trade-off, if the tax authorities choose to get more aggressive, transfer pricing and BEPS implications could weigh on corporate reputation. Walking the tightrope of transfer pricing, managing policies and calculations, and getting the systems in place to support them, is critical as we start to emerge from the crisis.
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