Transfer Pricing Associates

The Implication of SEC Publication of Transfer Pricing Disputes

post Wednesday October 17, 2012


Transfer pricing audits have been on the rise over the last few years. Governments are requiring more transparency, thus increased documentation  and disclosure requirements. It also allows tax authorities to accumulate more revenue.

Several changes in the regulatory system have occurred, specifically the FASB accounting standards codification  (ASC) requires US companies to publicly report any uncertain tax and transfer pricing positions in their annual statements for periods after December 15, 2008.  Starting from tax year 2010, the IRS introduced a Schedule Uncertain Tax Positions requiring detailed disclosure of uncertain tax position (UTP). Companies were required to  disclose their uncertain tax position when the company or related party had 1) one or more uncertain tax positions as part of their 2010 ASC 740 2) total assets were greater than or equal to $100 million.  In tax year 2012, the total asset limit will be reduced to $50 million and to $10 million in tax year 2014. Penalties apply to those companies who fail to file related party disclosure forms accurately.

Recently the Securities and Exchange Commission has started investigating the transfer pricing practices of seven companies: Google, Amazon, China United Insurance Services, Honda, Pitney Bowes, Red Hat and VASCO data security international.  These investigations resulted in Amazon facing a $1.5 billion increase in transfer pricing related taxes, China United Insurance Services IPO was rejected due to failure of proper disclosure of relationship with affiliate in their registration papers, Google was investigated on the disclosure of its 2006 Advanced Pricing Agreement in their financial statements and Honda was scrutinized on a $7 billion provision on transfer pricing between 2001 and 2006.  Europe has also become more strict in their transfer pricing disclosure policies and has opened investigations in to several large corporations.

So what does this mean for MNE’s?

The increased oversight of large enterprises has resulted in large tax liabilities and amendments to financial statements of the respective companies to reflect appropriate transfer pricing disclosure requirements. According to IRS commissioner Douglas Shulman, MNE’s are placing more emphasis on the disclosure of income allocation including transfer pricing (section 482). Placing companies under such scrutiny forces them to carefully review their transfer pricing related transactions saving them from increased tax liabilities and negative publicity from these public disclosures.

Source: TPA Global

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