Global tax changes, supply chain woes and pandemic add to transfer pricing uncertainty

International tax reforms, along with supply chain transformations spurred by the COVID-19 pandemic, are contributing to an unprecedented level of uncertainty about transfer pricing among business leaders, according to a new survey by Ernst & Young.

The 2021 EY International Tax and Transfer Pricing survey polled 979 transfer pricing professionals in 53 jurisdictions across 25 industries and found that 76% of the respondents said they are challenged by volume and complexity of global tax reforms, while 65% feel they lack input into key business decisions, and 58% see new legislation among their top three transfer pricing risks.

Transfer pricing is a strategy that’s frequently used by multinational companies to lower their tax bills, using cross-border payments between subsidiaries, property leases and intellectual property licenses. With countries working together under the auspices of the Organization for Economic Cooperation and Development to shut down some of the most widely used tax avoidance strategies, and the Biden administration’s support this year for a minimum tax rate on multinational companies, corporations are increasingly worried about how tax reforms might affect their tax strategies. Earlier this month, 136 countries agreed to set a minimum global tax rate, although the changes may face resistance in the U.S. Congress (see story).

EY’s biennial survey examined the impact of the recent tax law developments. “Supply chains are under strain from market pressures and are a focus of a barrage of new and evolving tax laws and regulations,” said EY global transfer pricing leader Tracee Fultz in a statement. “Evolving digital business models including working from anywhere policies raise new tax issues around permanent establishment, substance and profit allocation.”

While 71% of the survey respondents said the reforms would lead to increased transfer pricing-related costs for their organizations, 30% predict costs will rise by at least 10% over the next three years.

EY’s survey also found that 58% of transfer pricing leaders believe they’re not involved as much as they need to be in key business decisions as the world starts to emerge from the pandemic. Of those, 24% said they’re involved in some, but not all, decisions, while 30% said they’re only involved on a reactive basis.

Bottlenecks in the supply chain could have an impact on international taxes. In turn, the restructuring of supply chains and changing working patterns may affect transfer pricing work as well. The survey found that 61% of the respondents say they will probably be taking steps to modify their organization’s approach to transfer pricing along with their operations, compliance and documentation within the next two years.

Respondents cite various factors behind these changes, including changes to their business model (52%), supply chain (43%), work from anywhere practices (46%), and environmental, social and governance pressures (36%).

As companies support more remote work during the pandemic, the survey found many respondents expect to see impacts from workers who have been stranded outside the jurisdiction in which they’re employed, with 47% of the respondents saying they face these challenges now and 49% anticipating they will over the next two years. Moreover, 75% of the respondents expect their organizations will struggle to find workers with the necessary transfer pricing talent.

Many of the survey respondents anticipate more frequent and rigorous audits, with 65% predicting a rising number of transfer pricing audits overall, 53% expecting more scrutiny of transfer pricing documentation, and 48% foreseeing more rigorous audits in general, probing multilateral issues or entire value chains.

The issues that respondents think are most likely to come under scrutiny include intellectual property-related matters such as location and ownership of assets and control of risk (according to 38% of respondents), permanent establishment (37%), and headquarter and management services transactions (36%).

“The COVID-19 pandemic has led to profound disruptions to business models, in particular in supply chains, but also to ways of working and ESG,” said EY global international tax and transaction services leader Jeff Michalak in a statement. “These trends are having an immediate and material impact when it comes to taxes — specifically creating transfer pricing challenges. In order to manage these impacts, transfer pricing executives must secure greater alignment with their businesses, streamline transfer pricing functions and embrace digital models.”