Transfer Pricing In The New Global Economy

Author:Mr Fabrizio Lolliri and Nika Sinjeri
Profession:Hogan Lovells

Driven by ever-advancing technologies, today's multinationals need to quickly adapt to new ways of doing business — a process that can often leave them more vulnerable to risk including tax and transfer pricing, especially since new legislation and rules have been introduced post Base Erosion and Profit Shifting ("BEPS") project outcomes. Adequate and supportable transfer pricing model implementation can be a challenge for those who hope to withstand heightened scrutiny.

Take a manufacturing business. In the past, when brick and mortar factories still ruled the day, value created along the supply chain was easier to identify and therefore, where profit should arise and be taxable. With the rise of 3D printing and IP becoming one of the core drivers of the business, for example, that value chain has been altered, mostly centering around software, know-how and the key R&D people who develop the IP.

Identifying these new value drivers can be challenging for businesses with matrix structures. Management typically looks at reports showing financials for teams where the people might be both in various locations and adding different value depending on the functions and risks they manage. In other words, there is an increasing misalignment of management and statutory reporting. In the midst of rapid change, where an individual's function may become more important than the team's function as a whole, this missing information is crucial. What's more, the mere number of team members in a given location is not the only significant factor at play; tax authorities look to see who the key decision makers are within a team.

Misalignment exposes conglomerates to tax and transfer pricing...

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