Transfer pricing controversy trends – Deloitte’s 2024 global survey

In advance of the fourth edition of the Transfer Pricing Controversy guide (2021), Deloitte undertook an internal survey to better understand the global transfer pricing controversy landscape. This article analyses the results of Deloitte’s 2024 transfer pricing controversy survey that has been completed by Deloitte practitioners specialising in transfer pricing controversy in 37 countries in Deloitte’s global network.

With so much changing in the international tax space in recent years, the survey responses offer an objective measure of how transfer pricing controversy is developing across the world. Spotting trends in areas of transfer pricing controversy allows us to consider how the landscape may change over the next few years and enables businesses to strategise as to how best to manage transfer pricing controversy.

As noted in the 2021 survey, given the specialised and complicated nature of transfer pricing, it is perhaps unsurprising that tax authorities have continued the trend of having dedicated transfer pricing teams/departments. In fact, out of all the survey respondents, only one says that their tax authority does not have specialised transfer pricing teams.

Interestingly, the survey shows that fewer than 40% of transfer pricing audits were conducted in an integrated way with other international tax issues. While that could be a by-product of tax authorities having more specialised transfer pricing teams, it is expected that the percentage may increase over the coming years owing to how transfer pricing is becoming naturally integrated into other areas of international tax (noting, also, the introduction of pillar two). Ensuring that multinational enterprises have a consistent approach across all areas of international tax will be of increasing importance.

The survey shows that fewer than 25% of respondents noted that their respective tax authority currently shares information relating to findings from a transfer pricing audit with their local customs/VAT teams, with a number of those tax authorities not sharing information internally being in Europe. With data becoming increasingly key, and technology being more readily available to compare information given to different teams within a tax authority, this internal data sharing may rise in the coming years.

In relation to transfer pricing audits, nearly 95% of respondents highlight that there is a “likely” or “very likely” practical likelihood of a transfer pricing audit in their country, which is an increase from below 90% in the 2021 survey. That trend continues in response to the question as to how likely each respondent’s local tax authority would be to litigate a transfer pricing issue, with about 60% of respondents saying that litigation was “frequent” or “very frequent”, as opposed to only around 45% in the previous survey, with the majority of “infrequent” responses coming from the Asia-Pacific region.

In terms of topics being raised in transfer pricing audits, the issue that stands out as the most common area challenged by tax authorities in relation to transfer pricing was “loss-making entities”. Tax authorities are increasingly looking at profits across the whole multinational group and seeking to rationalise why the functional profile of the entity in their jurisdiction should be loss making if the rest of the group is making profits. Such scrutiny is expected to continue in the coming years as tax authorities look more at years impacted by the coronavirus pandemic, and indeed beyond that period, when any ‘exceptional circumstances’ rationale is much harder to justify for low-risk entities with losses.

In order of commonality of challenge, the other top five areas that respondents cite as being commonly challenged by tax authorities are, in order, comparables, services, financial transactions, and intangibles.

In terms of how tax authorities interrogate data in their transfer pricing audits, nearly all respondents say that conventional methods such as staff interviews and systems audits on data and numbers are common. Approximately 45% of respondents say that their tax authority would be likely to request email searches in a transfer pricing audit, and circa 20% might resort to ‘raids’.

As per the 2021 survey, the 2024 survey includes questions on country-by-country reports and how they are used in risk assessments and audits. The Country-by-Country Reporting: Handbook on Effective Tax Risk Assessment prepared by the OECD Forum on Tax Administration states that under the BEPS Action 13 minimum standard, country-by-country reports may be used by tax authorities for the purposes of high-level transfer pricing risk assessment, the assessment of other BEPS-related risks, and economic and statistical analysis, where appropriate.

However, country-by-country reports should not be used by tax administrations to propose transfer pricing adjustments. The requirement that country-by-country report information is used appropriately is a condition that must be met for a tax authority to obtain and use country-by-country reports.

There is a significant increase in respondents saying that country-by-country reports are used “frequently” in transfer pricing risk assessments, now nearer 30% of respondents, as opposed to 20% in the 2021 survey. In a similar vein to the 2021 survey, another 50% of respondents state that their tax authority “sometimes” uses country-by-country reports in transfer pricing risk assessment. However, encouragingly in the above context, as in the 2021 survey, only about 5% note that country-by-country reports are used in actual transfer pricing audits.

Interestingly, the recent survey shows a material uptick in respondents noting that their country applies “secondary adjustments”. While only around 40% of countries applied secondary adjustments in the 2021 survey, nearly 55% do in the 2024 survey. For such countries, the only clear way to avoid a cash disadvantage is to manage transfer pricing controversy risk so as not to have transfer pricing primary adjustments in audits, perhaps shining a light on the importance of robust transfer pricing policies and documentation to present to a tax authority.

The subject of penalties at the conclusion of a transfer pricing audit has always been fraught with debate. Given the element of subjectivity that often arises in transfer pricing, tax authorities have sometimes been reticent to charge penalties as it can be hard to prove that a taxpayer’s filed transfer pricing is ‘wrong’. The survey highlights that penalties in relation to transfer pricing are now “common” or “automatic” in nearly 75% of countries, with nearly 55% of countries having specific transfer pricing penalty regimes. Of that 75%, respondents from Australia, Czech Republic, Greece, Italy, Japan, Mexico, South Korea, and Uruguay state that penalties are applied “automatically” at the conclusion of a transfer pricing audit. Interestingly, of those countries, only three out of the eight have specific transfer pricing penalty regimes, with all other countries relying on general corporation tax penalty regimes.

Of those countries in which the respondents comment that it is “rare” to be charged a penalty at the end of a transfer pricing audit, most are from Europe, with the US being another notable country.

The 2024 survey also shows an increase in the number of ‘voluntary disclosure’ regimes operated by tax authorities, with over 60% in the 2024 survey, versus 50% in the 2021 survey. Such regimes are usually offered with the incentive that any penalties levied, if an inaccuracy is identified, will be lower than if a taxpayer were to not voluntarily disclose the inaccuracy. Voluntary disclosure regimes are seen across all geographies and can be expected to proliferate, owing to constrained government resources looking for more efficient ways of encouraging compliance, such as targeting areas of perceived risk.

For example, in the UK, HMRC has a Profit Diversion Compliance Facility that was introduced in 2019.

Advance pricing agreements (APAs) have long been the tool used most often to secure legal certainty in transfer pricing transactions for a future, finite, period. While APAs have been a valuable part of most multinationals’ armoury, the complexity of transactions and a group’s wider operations has meant that the time taken to conclude APAs is typically more than two years, as observed by more than 80% of respondents to the 2024 survey in relation to bilateral APAs, and roughly 40% of respondents in relation to unilateral APAs. This aligns with OECD statistics published on APAs (albeit that there is a greater time lag in these being made available). While timing can be a disincentive to pursue an APA, on September 28 2022, the OECD published the Bilateral Advance Pricing Arrangement Manual, which contains a list of best practices for businesses and tax authorities with the aim of improving the APA process, globally, leading to shorter times to conclude APAs.

While bilateral APAs have been encouraged by most tax authorities at the expense of unilateral APAs, in recent years, owing to the enhanced certainty that can be achieved in a bilateral agreement and the additional exchange of rulings requirements introduced by BEPS Action 5, tax authorities do still conclude unilateral APAs if requested and the circumstances befit a unilateral APA. However, businesses should be cautious in entering unilateral APAs where there is a likelihood of a transfer pricing audit on the other side of the transaction that could then be eligible for a MAP. Five respondents to the survey – from China, Hong Kong, India, Norway, and the US – note that a unilateral APA agreed in their country could restrict a taxpayer’s ability to request a MAP, acknowledging that some of those countries are more active in agreeing unilateral APAs than others.

The 2024 survey asks a question in relation to the interaction of transfer pricing audits and APAs; i.e., whether an APA could be requested while an audit, into a similar issue, was ongoing. Nearly 75% of respondents say that it would not be possible to request an APA in their country while a transfer pricing audit was taking place. The key message from the survey in relation to the interaction of APAs and transfer pricing audits is that APAs should be considered before a tax authority opens a formal transfer pricing audit.

While APAs are a tool to prevent transfer pricing disputes, MAPs are an equally useful device, and a right of businesses, to resolve transfer pricing disputes that have arisen.

Over 50% of respondents note that tax authorities are using domestic deductibility legislation on what are essentially transfer pricing matters. The problem this raises is that there is a risk that competent authorities may not allow an audit settlement made under domestic deductibility legislation access to a MAP, even if the other side of the transaction is an associated enterprise – something that 70% of respondents who state that domestic deductibility legislation is being used have seen in practice. This has the natural consequence of increasing the risk of unrelieved double taxation.

Since the previous survey, the OECD released its Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements on February 1 2023, which provides guidance for tax authorities and businesses in relation to how to navigate the complexities of multilateral APAs and MAPs, in particular. Encouragingly, only around 20% of respondents state that their country did not provide for a multilateral MAP, which suggests that there are avenues to alleviate double taxation in instances where there are layered transactions between different entities, in different jurisdictions. The international tax framework is built upon bilateral tax treaties, so there are some procedural hurdles to overcome in establishing a series of bilateral MAPs in a multilateral way. Careful thought should be given as to how to navigate such issues, although the above evidences that this is possible in practice.

Lastly on MAPs, only about 15% of respondents note that their country could roll forward MAP resolutions to subsequent years that involve substantially similar facts. This is perhaps to be expected, as MAPs deal with facts already obtained by one country in a transfer pricing audit, whereas tax authorities would see APAs as the appropriate route to address future periods.

The general trend coming out of the Deloitte 2024 transfer pricing controversy survey, particularly in the context of prior surveys, is that tax authorities across the globe see transfer pricing as an area of ever-increasing focus. The ever-evolving changes in the international tax landscape are likely to mean that this trend will continue. With increased emphasis on exchange of information and real-time reporting, and the importance of documentation, systems, and controls, it is more important than ever that multinationals have a clear strategy for managing their transfer pricing controversy – both existing, and, potentially, in the future.

Completely eliminating transfer pricing controversy risk is, realistically, unachievable, but there are a number of actions that multinationals could consider in the context of transfer pricing controversy challenges. Almost all these centre around appropriate rigour in the process of setting and managing transfer pricing, as well as preparation for the audits that remain increasingly likely to arise.

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