Aderndorff (2019) in relation to the South African Revenue Authority while pointing out protracted legal battles expressed similar views, expensive litigation processes and unrecovered legal costs in most tax cases. One could argue that the recommendation presupposes a cordial relationship between the MNEs and tax authority, which is not the case. The challenge with arbitration is that the resolution of conflicts, the processes and procedures undertaken remain privy to participants only (Biondi, 2017), hence leaving no future legal precedence. This one of the biggest challenges denoted by many researchers on the effectiveness of enforcement of TP regulations (Beebeejaun, 2018; Kabala & Ndulo, 2018; Oguttu, 2016). Eighty-three percent of TCs, 60% of ZIMRA and 40% of MINOFs pointed to the lack of clarity in legislation as a challenge to effective audits and dispute resolution. Ninety-two percent of TCs, 80% of ZIMRA and 60% of MINOFs concurred on the lack of comparable information as an important constraint.

  1. We are also aware of several recent and imminent MAP proceedings, some of them being multilateral MAPs.
  2. They contribute to economic growth, employment creation, poverty reduction and tax revenues to fund government expenditure (Blumenthal & Ratombo, 2017).
  3. Cheaper exports to tax havens, transfer pricing for profit shifting driven by taxes, the implications of tax-driven foreign direct investment and the benefits of tax transparency are some of the topics covered.
  4. The figure portrays the percentage of participants who alluded to the particular factor affecting the effectiveness of the audit and dispute resolution processes.

Even though the Danish distributor bears very little risk in the overall corporate structure, a crisis that puts the corporate group into a net loss position represents existential risk even to the distributor. The name of the game in the future may be less so on tax differentials between affiliates, but rather other economic incentives that are above the line. Especially in economies that are dependent on foreign direct investment, we may see new forms of incentives beyond traditional corporate tax rate measures. For example, governments may employ local tax incentives in connection with ESG, property taxes, rental subsidies, research grants, or payroll tax breaks. Joint development initiatives between governments and multinationals may provide for foreign direct investment incentives. From a worker perspective, tax incentives may be enhanced for employees of the multinational as located in particular jurisdictions, providing an indirect but valuable incentive for the multinational to be located in a particular jurisdiction.

Transfer pricing: Current trends and changes in the landscape

The study found out that TP legislation was still in its early stages of application in Zimbabwe after the country adopted the OECD guidelines in 2016. Findings relating to the contextual setting and the administration of the TP regulations are discussed in Section 4.1. The research also established that there was an interdependence relationship between the effectiveness of the audits (quality of evidence and findings) as well as that of dispute resolution Section 4.2. The highly complex nature of transfer pricing lends itself to being misunderstood as a scheme by a multinational corporation (MNC) to shift profits to affiliates in low-tax jurisdictions.

Some countries in Europe have made use of these extant pricing agreements with MNEs to securitise the tax revenue collection and solve the potential of tax dispute in advance (Avi-Yonah, 2017). As highlighted by Sundaram (2012) and Beebeejaun (2019) that, far from providing clarity and predictability during arbitration based on these agreements, the arbitration process saddles the already resource-constrained developing countries with financial burdens. Sundaram (2012) further states that the arbitration process is complicated and costly (payments often in foreign currency for arbitrators, translators, facilitators and other parties involved in the process). Resource constraints for developing countries with limited financial resources impede the practicability of applying the arbitration process in the context of developing countries and may even unduly tilt the scales against them (Beebeejaun, 2019). In addition to the above concerns, Akunobela (2012) submits that some of these treaties are ineffective because they were entered into being driven by political motives with little attention given to BEPS. Another key trend in transfer pricing is the growing pressure from tax authorities and international organizations to combat base erosion and profit shifting (BEPS), which refers to the strategies that MNEs use to reduce their tax liabilities by shifting profits to low-tax jurisdictions.

Further, combined with the ESG movement and in light of tax transparency, it is not in the interest of most C-suites to book profits in low tax jurisdictions with little operating activity, nor would this approach be likely to provide for material tax advantages given international tax reform. Transfer pricing is the practice of setting the prices of goods, services, intangibles, and loans between related entities within a multinational enterprise (MNE). It affects how much tax MNEs pay in different jurisdictions and how they allocate their profits and losses. Transfer pricing is subject to complex and evolving rules and regulations that vary by country and industry.

Market fluctuations

Automation can help MNEs to streamline and standardize their transfer pricing documentation, compliance, and reporting tasks, as well as to reduce the errors and risks involved. Data analytics can help MNEs to gain more insights and visibility into their intercompany transactions, performance indicators, benchmarking data, and tax positions, as well as to identify and address the gaps and opportunities for improvement. Automation and data analytics can also help MNEs to communicate and collaborate better with their internal and external stakeholders, such as business units, tax authorities, and advisors. ZIMRA is encouraged to consider other alternatives avenues as preferred options before taking the cases to court. The OECD (2012) encourages revenue authorities to minimise the scope of the dispute and seek engagement and dialogue and minimise confrontation, do a cost and benefit analysis to assess whether the likely revenues that can flow from the case make it worth pursuing. In a case where the likelihood of winning the case is high, litigate but where the scope is limited, compromise and in weak or less beneficial case concede as opposed to pursuing.

CPAs should be aware that some
national taxing authorities, including the IRS, will examine and may
approve a taxpayers proposed transfer pricing method in advance, thus
removing the uncertainty. Audits of intangible assets, transfer price flexibility, the impact of tax authorities, subsidiaries in tax havens and the auditing of multinational firms are some of the topics covered. The table emphasizes the necessity of practical justification and investigating transfer pricing’s wider implications.

To help graduate students pursue further degrees in this area, such as a master’s, thesis or PhD, this study will highlight five research issues. The current environment will certainly impact overall tax revenues for countries, and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. To cope with the increased separation of functions and risks within taxpayers, challenges of transfer pricing the OECD’s BEPS action plan reflects a new emphasis regarding the arm’s length standard with a heightened focus on economic substance. In addition, several of the BEPS action plans address issues such as functional and legal ownership in examining the allocation of income among tax jurisdictions relative to measures of value-creating activities. The latter approach not only avoids the incentive drawbacks of a
cost-plus system but in theory it also is the preferred way to value
the output of each unit.

1 TP Legislation Adoption and Application in Zimbabwe

MNCs can make more money by setting transfer prices to optimize overall organization profit rather than just lowering taxes within legal bounds (Gao and Zhao, 2015). The study emphasizes the need for customized transfer pricing laws that follow global best practices and consider each nation’s unique needs (Sebele-Mpofu et al., 2021). In the last two decades, the Chinese tax authorities have emphasized examining international corporations (Chan et al., 2015).

MNEs make up approximately 70% of Rwanda’s tax base and an estimated 88% of Nigeria’s tax base and more than 20% of Burundi’s total tax revenues (OECD, 2014). These prescribe the application of the arm’s length principles in pricing decisions of transfers (Cooper, Fox, Loeprick, & Mohindra, 2017; Kabala & Ndulo, 2018), though other alternative methods such as unitary and apportionment formulary have been advocated for (Avi-Yonah, 2015). This study makes an intellectual and practical contribution to the literature on TP especially on enforcement of the TP regulation as well as on the cogency of audits and dispute resolution mechanisms, which is an understudied area (Shongwe, 2019).

As a consequence of these changes MNEs have to accept that they are subject to a much greater degree of transparency when it comes to their worldwide group. The CbC report enables tax administrations to establish exactly where the group is making its profits – and the extent of such profits. The introduction of the Pillar Two minimum global tax regime, and of the broader BEPS initiatives, may further contribute to this trend. Margaret Brown is a member of EY’s Transfer Pricing and Economics practice for the Southwest Region. Brown has more than seven years of transfer pricing experience with EY and has served clients in energy and other industries. Another key challenge is where specific knowledge is held by a sole individual in the organisation in respect to the OTP processes.

Further, because Alpha is in
a high-tax state, any transfer pricing system that shifts taxable
income away from Alpha will probably be challenged almost
automatically by the state in which Alpha is situated. The only condition that triggers transfer
pricing is the existence of multiple facilities in more than one
taxing jurisdiction. For example, a company with 45 employees in five
locations in two states would activate transfer pricing concerns if
one of its offices provides data processing, payroll or other services
to the others. Similar situations arise in manufacturing, when one
division ships parts or unfinished products for final assembly at
another location in a different jurisdiction. Adjustments will inevitably impact where and how much taxes are paid and could lead to tax disputes with governments. To minimize tax disputes and uncertainty, the OECD should provide guidance on transfer pricing flexibility to allow companies an opportunity to adjust their pricing and profit attribution during the downturn.

There is considerable excitement about this programme and it is expected to be a significant area of focus going forward. For example, if an MNC has a legal entity in the United Kingdom that has manufacturing, distribution, R&D and service functions, the taxing authorities will want clarity on the profitability of each of the individual functional segments. At present, most companies’ financial systems are not set up to handle such rigor in segmented financial detail.

Subsequently, the OECD also issued a white paper that emphasizes transparency in transfer pricing documentation to enable risk assessments throughout the supply chain. The findings cover the trade-off between the incentive function and the transfer price tax roll and the potential implications of border adjustments on tax collection and global commerce. Omar and Zolkaflil (2015), Chan et al. (2015), Rathke (2015) and Nguyen et al. (2020) Investigate research methods and strategies for transfer pricing. Findings emphasize problems with auditing transfer pricing for intangible property, theoretical analyses of manipulation and competition, the connection between the capability of the tax authority and transfer pricing, the presence of subsidiaries in tax havens, and transfer pricing auditing procedures. Germany’s economy benefits from factors contributing to its competitive advantage in the car manufacturing industry. For instance, the absence of speed limits and the aspiration of citizens to lead a high-quality and fast-paced lifestyle foster a demand for high-speed luxury cars within the nation.

By Richard