Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

November 17, 2021
2021-6182

EY Global Tax Controversy Flash Newsletter (Issue 40) | Improve risk management by understanding the interplay between transfer pricing and indirect taxes

Transfer pricing and indirect taxation are both hot topics for multinationals, and the two areas interact in many ways. Understanding the interplay between transfer pricing and indirect taxes can help multinationals identify deductions and manage additional taxes and penalties. And while both tax types aim to apply an “arm’s length” standard to related-party transactions, it’s important that multinationals understand the fundamental differences that can increase audit risk.

One key risk area stems from a timing mismatch. Indirect taxes, such as customs and excise duties and value-added tax (VAT), are levied around the time when a transaction or importation takes place, whereas transfer prices may be set retrospectively. Transfer pricing adjustments made after goods have been imported or sold may create an issue for the duties and VAT that have already been declared and paid. If the transfer price increases, the value for indirect taxation may have been understated — leading to additional taxes and penalties. But if the price decreases, companies may struggle to reclaim the additional tax and duty paid. No wonder this is a growing area for audit scrutiny and taxpayer disputes.

Differences in import valuation methodologies are another risk area. Customs authorities are routinely looking to companies’ transfer pricing documentation to verify arm’s length import values during post-entry audits. This approach, however, may not account for the differences in valuation methodologies. Imported goods are valued individually on a transaction-by-transaction basis. In contrast, transfer pricing studies may take a broader category-by-category approach — making it hard to make a true comparison. 

Multinationals need to recognize the interplay between transfer pricing and indirect taxes, confirm that their policies align, and document and understand any different valuation approaches. By addressing the connection between indirect taxes and transfer pricing proactively, multinationals can establish effective tax approaches and procedures that anticipate and address issues.

Additional information and links to past newsletters can be found in the attached PDF.

__________________________________

Flash Newsletter attachment (Issue 40)

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct