Transfer Pricing: Danny Beeton and Guy Kersch Explain Why More and More FDs Will Need to Query the Transfer Pricing Basis for Most Items on Their Income Statements and Balance Sheets

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Multinational businesses and their

advisers view transfer pricing--ie, how they trade internally or calculate financial results for their branches--as the big tax issue. But, as European jurisdictions--including the UK--extend transfer pricing rules to purely domestic transactions, it's not only cross-border companies that are being affected.

In the US, the Financial Accounting Standards Board confirmed in January that its Interpretation 48, "Accounting for uncertainty in income taxes", would be effective for fiscal years starting after December 15, 2006. This requires US-listed companies and their subsidiaries in other countries to satisfy themselves that, where the tax position on an item in the financial statements is uncertain--as it may be where a transfer pricing valuation is required--the valuation of that item is more likely than not to be sustained under scrutiny. In continental Europe, tax inspectors are starting to question the transfer pricing policies behind each item. This is how the situation may develop in the UK as well.

Tax authorities can make lengthy inquiries if they believe that a transfer pricing policy may have resulted in the under-reporting of taxable profit in their jurisdiction. Their investigations can lead to substantial transfer pricing adjustments and penalties of up to 100 per cent. The affected firms may then lose suppliers and customers as their credit rating is affected, perhaps even pushing them out …