The changing international tax landscape, driven by the OECD’s Base Erosion and Profit Shifting (“BEPS”) process and its implementation, has increased compliance requirements and led many multinational groups to consider whether their transfer pricing policies are fit for purpose.For groups in the oil and gas service sector, complying with increased regulation and managing transfer pricing risk has come as a challenge, particularly in the context of reduced headcount and cost pressures facing many groups. The evolving international landscape does, however, mean greater attention to transfer pricing will be required going forward.
Tax authority activity
Increased information sharing between tax authorities, as well as the introduction of country by country reporting for larger groups, is leading to greater level of tax authority scrutiny and challenge to transfer pricing arrangements.
The Deloitte 2018 BEPS Global Survey provides evidence of this. 447 respondents from multinational groups responded on various questions to gather views on developments in their organisation given the changing tax landscape. 86% of UK respondents to the BEPS global survey ‘agreed’ or ‘strongly agreed’ that tax authorities “will increase tax audit assessments globally as a result of the current BEPS debate”1. Further, statistics released by HMRC showed that UK transfer pricing challenges secured additional tax yield of over £1.6 billion in 2017/2018, over three times as much as the equivalent yield in 2012/20132.
With some traditional oil producing countries being particularly aggressive in challenging transfer pricing, the need for groups in the sector to give thought to their transfer pricing policies and documentation procedures is even more important. It is worth noting cash tax exposure is not the only significant risk arising from a transfer pricing challenge; often enquiries take a significant amount of management time and resource to address, which could be focused on other areas of the business. HMRC statistics show that the average age of settled UK transfer pricing enquiries in the 12 months to 31 March 2018 was 24.7 months. This increased to 30.4 months for open enquiries.
Having well designed transfer pricing policies compliant with OECD principles, with properly considered implementation and clear and consistent documentation, will be important to mitigate the risk of a successful challenge by tax authorities, and the time spent by management in reaching resolution.
Time to revisit
As market optimism picks up in line with recent oil price rises, revisiting transfer pricing policies and compliance procedures is a priority area for many multinational groups, particularly as they seek to take advantage of an upturn in international projects.
As well as being a tax related risk for many groups, it is worth remembering that a robust transfer pricing policy, aligned to economic substance and value drivers, will still be a contributing factor to a group’s management of ETR and cash tax profile. Given increased revenue activity and a need to manage tax strategy and compliance, now is an opportune time for groups to revisit their approach to transfer pricing.