New focus on audits - Asian tax authorities playing ‘catch-up’

THERE is a new level of sophistication in audit and review of transfer pricing documentation with tax authorities in Asia challenging multinational corporations in the courts . . .

SINGAPORE — With more countries implementing laws on transfer pricing throughout Asia, more multinational companies can expect to come under scrutiny for their inter-company transactions.
Today, China, Vietnam and, in fact, virtually every major country in Asia, has transfer pricing rules. There has been a general ramping up of audit and review of transfer prices by tax authorities over the last three to five years, says Michael Nixon, Baker & McKenzie.Wong & Leow transfer pricing consultant, based in Singapore.
Countries which have more experience with transfer pricing are becoming more sophisticated in their line of questioning when conducting audits, and in reviewing transfer pricing documentation, he says. Singapore established its transfer pricing rules in 2006.
The upshot is that tax authorities are challenging corporations in courts.  “For example, we have seen increasing numbers of transfer pricing cases go to court in Australia over time, and some have been concluded in the last three to five years.”
Nixon says: “There has also been a lot more litigation in India and Indonesia.” He adds that the trend is for more legal challenges in future.  (Reuters has reported that Indonesia will crack down on corporate tax avoidance via transfer pricing this year, aiming to recoup 200 trillion rupiah (US$15.5 billion) in lost revenue. Indonesian authorities says many Indonesian companies, particularly in the coal, palm oil, cocoa, and other commodities sectors, are using transfer pricing to avoid corporate taxes.)
“Companies need to ensure that they have robust transfer pricing documentation and transfer pricing analysis,” says Nixon. He believes it is a certainty that, once a country has transfer pricing rules in place, there will be increased focus on audits — and reviews of multinational companies operating in their jurisdictions.
Tax authorities are looking at the profits of multinational corporations to ensure that companies comply with transfer pricing rules and ultimately pay the correct amount of tax.  
“Countries are very interested in ensuring that they achieve their appropriate share of the pie, and, in conjunction with that, you find that tax authorities are implementing transfer pricing rules to make sure they don’t fall behind other countries.”
Indeed, cash-strapped governments are looking to claw back what they perceive to be their share of tax from companies – both domestic and, predominately, multinational corporations. Governments are increasingly engaging in international forums to do so.
In fact, the OECD produced, at the request of the G20, an action plan to address issues in the international tax system in a project known as "BEPS". This Action Plan identifies 15 specific actions, including some related to transfer pricing, which aim to review whether existing laws and guidance are sufficient to ensure countries collect their "fair share" of tax, and address any existing gaps through revising such laws and guidance.
Nixon says that, with growth in international trade, coupled with the fact that companies are operating in a global environment, transfer pricing is becoming a bigger issue for companies as well as for countries.
Transfer pricing itself is not new. It has been around for almost 100 years, says Nixon. The OECD and US implemented their (subsequently revised) guidelines on transfer pricing in 1995 and 1994, respectively. The so-called OECD standard is known as the “arm’s length principle”, where a transfer price is established by looking at independent market transactions of comparable goods or services.
Governments, including those in Asia, generally work around the principles contained within the OECD guidelines, using the arm's length principle as their base — but they will sometimes have their own interpretation of these guidelines.
However, while such interpretations do at times differ, the majority of the interpretation and implementation of the guidance is similar, thus aiding the consistency of reviewing transfer prices across different tax jurisdictions.
Setting an appropriate transfer price is a complex exercise that relies on an economic analysis of the facts and circumstances of the transaction and a "benchmarking" analysis of extensive independent market data, he says. The aim is to arrive at a reasonable approximation of how independent companies would establish a price for a similar transaction.
The analysis and factual assertions are then documented by companies with a view to demonstrating due care and attention to setting arm's length transfer prices. This also provides a basis for defending their policies if reviewed by tax authorities.  
This is where law firms like Baker & McKenzie are called upon to draw up transfer pricing documentation. Its Singapore member firm — Baker and McKenzie.Wong & Leow —  has three times as many tax lawyers as its competitors in response to increasing demand for advice on taxation issues like transfer pricing.
Transfer pricing is now a fact of life, Nixon says. “This is where people like us come in to help taxpayers set an arm’s length price.”
Nixon says the issue for business is consistency. It is difficult for companies to achieve compliance if there is no consistency in rules.
One question that has arisen is this: Is there a reasonable alternative to the arm's length standard? One possible alternative outlined in the OECD guidelines is what is known as ‘global formulary apportionment’— that is, a sort of formula on how to apportion tax to various jurisdictions where a company has operations.
However,  while its possible adoption was discussed, it ultimately was rejected.
Nixon says a Singapore taxpayer who operates in Asia Pacific wants to be reasonably sure that there is a common basis on which to work out the transfer price of goods and services for inter-company transactions.