The Importance of Localization to Your Bottom Line

~3-minute read. This article identifies the current trend among tax authorities for requiring hyper-localized documentation.

In 2017, it is estimated that tax authorities worldwide raised over $50,000,000,000 in transfer pricing adjustments. Unfortunately, this is just the beginning. Many countries have come to the realization that since transfer pricing enforcement can target foreign subsidiaries who don’t vote, it is effectively a cash cow that can help governments close their budget deficits. As such, governments have doubled down and provided almost unlimited resources to their tax authorities so that they can audit more companies for transfer pricing. In just a couple of years, fifty billion is going to seem like a drop in the proverbial bucket.

A recent survey of tax directors found that 84% of MNCs expect to be audited for transfer pricing in at least one jurisdiction within the next two years. Based on trends that CrossBorder Solutions is seeing with our client base, we believe that this is extremely optimistic. With the dramatic rise in audit resources, we would predict that most, if not all, MNCs will face audits in multiple jurisdictions in the coming years. In either case, taxpayers must begin to prepare for this new reality.

In the past, most MNCs have prepared studies that were designed to protect against penalties. To this end, generic OECD studies usually sufficed as they demonstrated a good faith effort to comply with the regulations. However, the generic approach is no longer acceptable. Chapter V of the OECD Guidelines are not regulations, do not carry the force of law, and certainly are not enforceable in any jurisdiction. They are simply recommendations that provide non-binding principles and standards that multinational corporations can or cannot follow. As such, from a legal stand-point, merely citing these guidelines is not sufficient. Therefore, generic studies do not protect companies against audit and adjustments. In fact, they may actually encourage a tax examiner to take a harder look at the report(s).

Today, most countries have adopted their own transfer pricing regulations that provide detailed guidance as to how the economic analysis should be undertaken and how the documentation should be prepared. One of the best ways to protect against audit and adjustments is to prepare reports that have been customized for the local jurisdiction. While this will marginally increase the costs of compliance, the expense will be much less than the costs associated with an audit/adjustment process.