Businesses fear global tax reform will lead to double taxation

• 86% of Southeast Asia (SEA) transfer pricing professionals (global 84%) say they risk double taxation due to global tax reforms
• 54% of SEA respondents (global 75%) cite disparate systems and ineffective use of technology as a key challenge
• Heightened risks spur drive for transfer pricing certainty

Global tax reform, ineffective use of technology and economic uncertainty are putting significant strain on businesses’ transfer pricing (TP) capabilities, according to the 2024 EY International Tax and Transfer Pricing Survey. 

Transfer pricing is a critical tax function for organizations around the world. It oversees internal corporate transactions, including cross-border payments between subsidiaries, property leases and intellectual property licenses.

Respondents to the EY study indicate that they are now entering a period of effective tax rate instability, driven by factors including shifting supply chains, global tax reform and inflation.

The global survey of 1,000 transfer pricing professionals and stakeholders in 47 jurisdictions, including 35 from SEA, finds that (SEA 86%, global 84%) of respondents face a “moderate” or “significant” risk of double taxation due to global tax reform. And 71% (SEA and global) say that global minimum taxes will have a “moderate” or “significant” impact on their transfer pricing policies. Demand for advanced certainty on TP positions via advanced pricing agreements with tax authorities has doubled.

Sockalingam Murugesan, EY Asean Transfer Pricing Leader, says:

“The complexities around implementing global tax reform continue to take their toll on tax departments. With the heightened risk of double taxation, getting certainty is at a premium. This requires a fundamental pivot from tax consideration to building as much certainty as possible into transfer pricing positions, which means being as proactive as possible in dealing with current and anticipated controversies. In line with this, we are seeing an increase in clients across Southeast Asia applying for advanced pricing arrangements (APAs) to obtain transfer pricing certainty and an increase in mutual agreement procedures in many markets in the region to reduce the risk of double taxation.”

External factors impacting TP strategies

The cascade of external pressures impacting business decisions is complicating TP leaders’ roles. Of those surveyed, (SEA 71%, global 77%) say inflation will have a “moderate” or “significant” impact on their transfer pricing policy over the next three years, while (SEA 43%, global 51%) say higher interest rates have impacted their medium and long-term intercompany debt pricing.

Changes in supply chains and commitments to environmental, social and governance (ESG) objectives add further challenges. In SEA, 11% (global 28%) have already changed their transfer pricing policy to account for ESG policy, while 40% (global 42%) say their organizations have relocated production from one jurisdiction to another in the last three years because of geopolitical issues. About six in ten (SEA 57%, global 62%) anticipate changes to supply chains having a “moderate” or “significant” impact on their TP policy in the next three years as well.

Sockalingam says:

“As organizations adjust their operational strategies to deal with supply chain risks and meet their climate ambitions, tax departments will also need to adjust their transfer pricing approach to align with evolving business goals. A clear roadmap for standardizing tax and transfer pricing data is needed to help businesses better react to these challenges. While companies across Southeast Asia were more concerned about meeting compliance requirements in the past, today we are seeing more interest in operationalizing their transfer pricing policies to make them more robust and reduce year-end adjustments.”

Embracing emerging technologies to drive strategic value 

Fifty-four percent of SEA respondents (global 75%) say that ineffective use of technology was their first or second biggest challenge, while 65% (global 67%) ranked “poor data quality” as their first or second biggest challenge. Interestingly, (SEA 83%, global 73%) say that investing in more sophisticated operational transfer pricing technology would result in “moderate” or “significant” improvement in risk management, and (SEA 80%, global 88%) cite they expect TP technology to save their organization money over the next three years.

Marna Ricker, EY Global Vice Chair – Tax, says:

“Companies now face many new and complex tax reporting requirements globally, with more requirements on the horizon. Many of these requirements include taxation at source as a transaction occurs. 

“New and emerging technologies, including generative AI, robotic automation and quantum computing, will be key in helping tax professionals meet these demands. Yet, many are in the early stages of learning how to deploy such technologies. Organizations must prioritize tax in their data and technology transformation roadmap to ensure their tax teams are equipped to deal with these challenges.” 

Heightened risks spur drive for transfer pricing certainty

The survey shows a dramatic increase in companies turning to APAs, which allow businesses to negotiate the terms of their intercompany transactions with tax administrators for multiple years before filing tax returns. This creates greater certainty around their TP positions and more value in a Base Erosion and Profit Shifting (BEPS) 2.0 world. The survey found that and say bilateral (SEA 46%, global 61%) and multilateral APAs (SEA 46%, global 59%) will be “very useful.” In addition, 49% of SEA respondents (global 59%) say unilateral APAs will be “very useful” to managing TP-related controversy over the next three years.

Sockalingam says:

“It’s time that transfer pricing functions break with the traditional linear path in which they first plan, implement and ultimately defend positions. They should focus instead on the best approach to achieve certainty. This includes having dispute resolution plans supported by automation and standard data. In many transfer pricing audits across SEA, tax authorities are going beyond requesting for just transfer pricing documentation. Tax audits today are more issue-focused and requests for source documents and agreements to substantiate transactions are more prevalent. As such, companies must have appropriate policies to maintain the appropriate analysis and documentation beyond just their transfer pricing compliance documentation.

“Ultimately, TP policies are supported by facts and data. Amid the current landscape of regulatory and tax changes, tax and transfer pricing professionals must adopt a more proactive role in collaborating with the C-suite to gain more certainty around transfer pricing matters and respond early to economic and geopolitical disturbances.”

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About the survey    

The 2024 EY International Tax and Transfer Pricing Survey was conducted between September and October 2023. The double-blind study queried 1,000 executives at large companies in 47 jurisdictions and across 19 industries about a variety of international tax and TP issues. The EY organization was not identified as the sponsor of the survey.