The 2024 EY International Tax and Transfer Pricing Survey reveals that global tax reforms, technological inefficiencies, and economic volatility are exerting considerable pressure on the transfer pricing (TP) functions of businesses.
Transfer pricing plays a pivotal role in global organizations, managing internal transactions such as cross-border subsidiary payments, property leases, and intellectual property licensing.
The survey participants are signaling a phase of fluctuating effective tax rates, influenced by changing supply chains, tax reforms, and inflationary trends.
Conducted globally among 1,000 TP professionals across 47 jurisdictions, including 35 from Southeast Asia (SEA), the survey uncovers that a majority (SEA 86%, global 84%) perceive a moderate to significant risk of double taxation due to tax reforms.
Similarly, 71% across both SEA and the global stage anticipate that global minimum taxes will moderately or significantly affect their TP policies. There’s also a noted surge in the pursuit of certainty in TP through advanced pricing agreements (APAs) with tax authorities.
EY’s ASEAN Transfer Pricing Leader, Sockalingam Murugesan, commented: “Tax departments are increasingly burdened by the complexities of global tax reform. The looming threat of double taxation has made obtaining certainty a high priority. This demands a strategic shift from mere tax compliance to proactive engagement with potential and existing tax disputes.
“Consequently, we’re observing a rise in Southeast Asian clients seeking APAs for assured TP outcomes and engaging in mutual agreement procedures to mitigate double taxation risks.”
Influences on TP Strategies
A multitude of external factors is complicating the decision-making process for TP leaders. A significant portion of those surveyed (SEA 71%, global 77%) believe inflation will impact their TP policies in the coming years, while nearly half (SEA 43%, global 51%) are already feeling the effects of rising interest rates on intercompany debt arrangements.
Supply chain modifications and commitments to environmental, social, and governance (ESG) goals present additional hurdles. In SEA, a small fraction (11%) has adjusted their TP policies for ESG considerations, whereas 40% have shifted production due to geopolitical concerns. A majority foresee supply chain alterations affecting their TP policies in the near future.
Murugesan added: “As companies recalibrate their operations to navigate supply chain uncertainties and achieve environmental objectives, tax functions must realign their TP strategies accordingly.
“Establishing a standardised framework for tax and TP data is essential for businesses to adapt to these shifts. The focus in Southeast Asia is transitioning from compliance to operationalizing TP policies for enhanced resilience and minimized end-of-year adjustments.”
Technology’s Role in Strategic Enhancement
A notable percentage of SEA respondents (54%) cite the suboptimal use of technology as a primary challenge, with 65% pointing to data quality issues. Interestingly, a majority (SEA 83%, global 73%) believe that investing in advanced TP technology could significantly improve risk management, and a similar proportion (SEA 80%, global 88%) expect technology to yield cost savings over time.
EY’s Global Vice Chair – Tax, Marna Ricker, said: “Businesses are now navigating a landscape filled with intricate tax reporting obligations, with more on the horizon. These often involve immediate taxation at the point of transaction.
“Emerging technologies like generative AI, robotic automation, and quantum computing are crucial for tax professionals to meet these new demands. However, many are still learning to harness these technologies effectively. It’s imperative for organizations to prioritize tax considerations in their data and technology strategies to empower their tax teams to tackle these challenges.”
Pursuit of TP Certainty
The survey indicates a marked increase in companies opting for APAs, which provide a pre-negotiated framework for intercompany transactions with tax authorities, ensuring TP certainty and value in a BEPS 2.0 environment. A significant number of respondents find bilateral (SEA 46%, global 61%) and multilateral APAs (SEA 46%, global 59%) to be highly beneficial, with unilateral APAs also gaining favor.
Murugesan concluded: “TP functions must evolve from the traditional sequence of planning, implementing, and defending positions to a strategy centered on achieving certainty. This involves dispute resolution mechanisms supported by automated and standardized data. Tax audits in SEA are becoming more detailed, with authorities requesting substantial documentation to support transactions. Therefore, companies need to maintain comprehensive policies and documentation to substantiate their TP practices.
“In light of ongoing regulatory and tax changes, tax and TP professionals should proactively collaborate with executive leadership to secure TP certainty and swiftly address economic and geopolitical shifts.”
