Poor transfer reporting a 'career-ending' issue

US Treasury

Large UK companies that fail to document transfer pricing properly on goods and services exchanged between subsidiaries risk a ‘career-ending event’ and hefty fines, according to a former US Treasury official.

Philip West, former head of international tax at the US Treasury, said there is an increasing need for companies to document transfer pricing accurately, or subject themselves to penalties between 20% and 40% of the total tax lost to the US Internal Revenue Service (IRS). ‘They need to report it before the return is filed. 40% is a career-ending event,’ he said.

Transfer pricing ­ the price that units of the same company charge each other for goods and services ­ accounts for more than half of all world trade. Companies are supposed to charge market rates for the internal transactions, setting prices at so-called ‘arms length’. However, tax authorities believe large companies use transfer pricing to charge artificial prices for internal transfers in order to avoid tax by moving their profits to low-tax countries.

In 2006, GlaxoSmithKline, the world’s second-biggest drugs manufacturer, was fined $3.4bn (£1.8bn) by the IRS after settling a tax dispute over its transfer pricing arrangements dating back to the 1980s.

West said there was strong evidence that multinational companies were still breaking transfer pricing rules, particularly in lower tax jurisdictions.

Charles Triplett, speaking on behalf of the Business and Industry Advisory Committee to the Organisation for Economic Co-operation and Development, said he welcomed a push by governments to clamp down on corporate abuses of transfer pricing.

‘Consistency of approaches by governments is essential,’ he said.

Under the 1999 UK Transfer Pricing legislation, HM Revenue and Customs has the power to impose a penalty of £3,000 for insufficient documentation, and a penalty of 100% of tax lost if insufficient care has been taken to identify a fair arm’s length price.

In August, KPMG warned that tax authorities were seeking to enforce transfer pricing regulations and would likely consider a broader range of company transactions, which can result in more detailed investigations.

Transactions likely to arouse the suspicion of tax authorities include unusually high profits or losses in a group company; corporate restructurings involving closures; or reductions in operations and dealings with a group company in a tax haven, the KPMG report said.