The Global Transfer Pricing Outlook for Multinational Enterprises

After a turbulent 2022, the winds of change continue to blow this year as the macroeconomic environment experiences high inflation and correspondingly rising interest rates.

On top of this, the international tax reform on Pillars One and Two is gaining momentum, with transfer pricing rules being introduced in certain key jurisdictions and multinational enterprises continuing to seek tax certainty.

Macroeconomic Trends

The central banks of major economies are expected to continue to monitor inflation and find a balance between economic growth on one hand and controlling inflation on the other. The latter seems to be the priority and therefore there has been an increase in interest rates, reaching levels unprecedented since the last financial crisis. These developments have a direct impact on the arm’s-length nature of intragroup arrangements as considered below.

Intragroup Financing

An increase in market interest rates is resulting in higher funding costs for MNEs that ideally should be reflected in pricing of intragroup loans and cash pooling arrangements. In addition, the embedded options included in the loan agreements and the options realistically available to parties within a cash pool should also be reassessed, as previous positions might need to change, given economic circumstances. In any event, it is advisable to document the reasons behind taking a particular stance as it could prove vital in future audits.

Asset Valuations

Discount rate is one of the most important inputs in a discounted cash flow valuation and its calculation takes into account current market circumstances. With the increase in market interest rates, the discount rates will be impacted, which would have a bearing on the value of the asset as well. It is therefore crucial that careful consideration is provided to the timing of intragroup asset transfers as it can have a significant tax impact.

Limited Risk Activities

Working capital adjustments generally are undertaken to approximate compensation for limited risk activities, as these adjustments capture differences in working capital (accounts receivable, accounts payable, and inventory) between tested party and comparables. It involves adjusting returns for time value of money, which is based on market interest rates. Any increase in rates potentially would enhance the adjustment and lower the return for limited risk activities.

In this respect, it is advisable for MNEs to update their transfer pricing policies, if required, to ensure consistency with market conditions and the arm’s-length principle.

Country Developments

Brazil. The country is on course to introduce the arm’s-length principle: the proposed transfer pricing legislation has been approved by Congress, with a final deadline for conversion into law scheduled for June 1. This would be a significant departure from the current transfer pricing system, which is based on fixed margins.

MNEs with operations in Brazil may want to consider evaluating their operations and assessing the potential impact of changes. A prudent way to approach the changes would be to undertake a fact-finding exercise; delineate and map all intragroup transactions involving Brazil; and prepare a roadmap to implement new rules which could include setting up a new transfer pricing policy, preparing transfer pricing documentation, drafting new intragroup legal agreements, and quantifying overall tax impact from these changes.

United Arab Emirates. The transfer pricing landscape in the past few years has been changing dramatically in the Middle East, as various countries have introduced transfer pricing legislation. The corporate tax and transfer pricing regime in the UAE is set to enter into force from June 1. The corporate tax rate will be 9%, and the transfer pricing rules will apply to companies in the mainland as well as in the free zones.

These new rules, coupled with a wide network of double taxation treaties, the talent pool, and its geographic location, present an opportunity for MNEs to consider the UAE as a potential location for regional headquarters with a hub for intellectual property and financing operations.

UK. The transfer pricing legislation in the UK has always been aligned with the OECD transfer pricing guidelines, except for the legally prescribed content of the transfer pricing documentation. In late 2022, the UK tax authority, His Majesty’s Revenue and Customs, introduced Master File and Local File requirements (based on Organization for Economic Cooperation and Development transfer pricing guidelines) for accounting periods beginning on or after April 1.

As MNEs plan the preparation of their global transfer pricing documentation, they must now include UK in the mix, which probably may not have been the case previously.

Tax Certainty

Given the current macroeconomic environment and seismic shifts in the transfer pricing environment with global tax developments, MNEs could consider attaining certainty through alternative (and advance) dispute resolution of transfer pricing disputes.

One of the tools available is an advance pricing agreement that provides increased certainty, as it eliminates both current and future transfer pricing audit risk. Removal of a transfer pricing audit threat allows MNEs to plan resources appropriately and reduce compliance costs.

In contrast, a mutual agreement procedure can be initiated separately from domestic dispute resolution mechanisms through bilateral tax treaties between countries. The MAP is a mechanism for competent authorities to discuss cross-border taxation of a specific transaction to try to alleviate double taxation for the benefit of taxpayers. MAP cases are an increasing trend but are still underused, mainly due to lack of understanding of the process and perceived obstacles. Based on the 2021 MAP Statistics from the OECD, three-fourths of the cases end up providing relief to the taxpayer, which is extremely encouraging.

It is for taxpayers to assess whether using such tools is an option. In our experience, and as the statistics suggest, these tools are for the benefit of the taxpayer and can have positive consequences beyond providing certainty and eliminating double taxation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tatiana Amba is a senior economist and a knowledge lead for the DLA Piper international transfer pricing team. Rachit Agarwal is a transfer pricing director with DLA Piper.