Accelerated upheaval across the international tax landscape spurred by tax reforms across the world as well as initiatives such as the OECD's digitalization effort have led to unprecedented uncertainty among global tax executives. This is according to the EY Transfer Pricing and International Tax Survey 2019, which includes responses from more than 700 senior tax and transfer pricing executives representing the Americas, Europe and Asia-Pacific.

The survey covers a wide range of trends and issues along three principal areas: transfer pricing, controversy and global tax reform. As the findings reveal, almost eight out of ten executives (79%) describe today's international tax environment as "uncertain," with 42% saying "very much so" or "extremely so."

Peter Griffin, EY Global Transfer Pricing Leader, says:

"The tax world is moving to an era of multilateral policy and administration, which is causing monumental shifts in the practice of transfer pricing. Executives believe there will be an upswell in the depth, breadth and frequency of challenges to transfer pricing. Specifically, executives surveyed anticipate significantly more instances of audits, fines and assessments, and they recognize the need to respond."

Transfer pricing: the focus is risk  

Sixty-four percent of respondents cite risk avoidance and mitigation as the primary drivers of their transfer pricing priorities. According to surveyed executives, the top three factors contributing to concerns around tax risk include: 1) increased information sharing among tax authorities, 2) information being made public, or reputational risk, and 3) a relative lack of centralized and consistent control in responding to tax authorities.

Jeff Michalak, EY Global International Tax and Transaction Services Leader, says:

"Transfer pricing will remain a top focus during audits of multinational companies as a general dissatisfaction with the administrability of the arm's length standard continues among tax authorities. This is evident in the latest OECD project on addressing the tax challenges of the digitalization of the economy, known as BEPS 2.0, which implies that the digitalization of the economy may require a significant rethinking of transfer pricing principles in certain circumstances. Fortunately, the OECD has been open to and engaged in dialogue with the taxpayer and advisor community to ensure administrability and increase certainty to the controversy burden on both taxpayers and tax authorities around the world."

Clouds of controversy

In the survey, 82% of respondents say they have experienced challenges to their transfer pricing over the past three years, with 40% of these saying that the resulting adjustments have led to double taxation. The most critical areas of tax controversy according to respondents continue to be: transfer pricing of goods (64%), intragroup financial services (41%) and value added tax (VAT) or goods and services (GST) tax (34%). Going forward, survey respondents expect that these areas would not likely change but cite two notable exceptions where they expect a significant increase in scrutiny: challenges to intellectual property (49%) and private equity (PE) controversy (39%).

Marlies de Ruiter, EY Global International Tax Services Policy Leader, says:

"The sense we're getting from everywhere we look is that tax directors are already struggling with controversy and it's increasing. But the expected levels of controversy are intensifying, and we see conditions and circumstances that are likely to drive remarkable numbers of reviews, challenges, audits and double taxation."

Global tax reforms having major impact on transfer pricing policies

The majority of survey respondents (59%) say that the greatest impact of global tax reform will be felt in fundamental transfer pricing rules. The second and third key areas of impact are permanent establishment (13%) and thin capitalization rules (11%). Overall, tax reform is creating profound changes, taking place not only in tax rates, but at fundamental levels impacting definitions of what can be taxed jurisdiction by jurisdiction.

When asked to rank the area of operations or tax strategy that is most impacted by global tax reform, the most frequently cited business component is the supply chain (41%), followed by treasury operations (29%) and intellectual property (IP) strategy (also 29%).

Griffin says:

"The degree and pace of change of global tax reform has become so great that it is now critical for businesses to think strategically to reflect the evolving landscape. As 'uncertainty' becomes the watch word for many, looking ahead to the short-, medium- and long-term impacts of local and global reforms is the only way to implement an adaptive and effective tax strategy."