Businesses fear global tax reform will lead to double taxation, according to new EY survey

Global tax reform, ineffective use of technology, and economic uncertainty are putting significant strain on businesses’ transfer pricing (TP) capabilities, according to the 2024 EY International Tax and Transfer Pricing Survey. 

Transfer pricing is a critical tax function for organizations around the world, that oversees internal corporate transactions including cross-border payments between subsidiaries, property leases and intellectual property (IP) licenses.

Responding businesses expect that we are now entering a period of effective tax rate instability, driven by factors including shifting supply chains, global tax reform and inflation.

The global survey of 1,000 transfer pricing professionals and stakeholders, in 47 jurisdictions, finds that 84% of respondents face a “moderate” or “significant” risk of double taxation as a result of global tax reform and 72% say that global minimum taxes will have a “moderate” or “significant” impact on their transfer pricing policies. Demand for advanced certainty on TP positions doubles.

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Adrian Rus, EY Romania Transfer Pricing Leader: “The latest changes introduced in the Romanian tax regulations as part of the Global Tax Reform would likely change the way businesses think on transfer pricing certainty and their operational TP requirements. Given the already increased number of transfer pricing controversy cases in Romania, the number of companies considering to achieve certainty using APAs concluded with the Romanian tax authorities would likely further increase in the next period. Also, the effectiveness of the dispute resolution programs (such as Mutual Agreement Procedures) would be put to a test as a number of companies facing double taxation risks as a result of BEPS Pillar One and Pillar Two initiatives would increase.“

External factors impacting TP strategies

The cascade of outside pressures impacting broader business decisions are complicating TP leaders’ roles. Of those surveyed, 77% say inflation will have a “moderate” or “significant” impact on their transfer pricing policy over the next three years, while 51% say higher interest rates have impacted their medium and long-term intercompany debt pricing.

Changes in supply chains and commitments to environmental, social and governance (ESG) objectives add further challenges. Twenty-eight percent have already changed their transfer pricing policy to account for ESG policy, while 42% say their organizations have relocated production from one jurisdiction to another in the last three years because of geopolitical issues. More than six in ten (62%) anticipate changes to supply chains having a “moderate” or “significant” impact on their TP policy in the coming three years as well.

Embracing emerging technologies to drive strategic value 

Seventy-five percent of respondents say that ineffective use of technology was their first or second biggest challenge, while 67% ranked “poor data quality” as their first or second biggest challenge. Interestingly, 73% say that investing in more sophisticated operational transfer pricing technology would result in “moderate” or “significant” improvement in risk management, and 88% cite they expect TP technology to save their organization money over the next three years.

Heightened risks spur drive for transfer pricing certainty

The survey shows a dramatic increase in companies turning to advance pricing agreements (APAs), which allow businesses to negotiate the terms of their inter company transactions with tax administrators for multiple years before filing tax returns, to create greater certainty around their TP positions and more value in a Base Erosion and Profit Shifting (BEPS) 2.0 world: 61% and 59% say bilateral and multilateral APAs, respectively, will be “very useful,” up from 34% and 30%, respectively, in 2021. In addition, 59% of respondents say unilateral APAs will be “very useful” to managing TP-related controversy over the next three years, more than double the 29% of respondents in 2021.

Ultimately, TP policies are supported by business facts and data. The current landscape of regulatory and tax changes mean tax and transfer pricing professionals will also need to adopt a more proactive role in partnering with the C-suite to gain more certainty around transfer pricing matters and respond early to economic and geopolitical disturbances.