In a pandemic environment, longstanding transfer pricing policies can lead to suboptimal tax results. Multinationals that incur losses in some locations while earning generous profits in others could be overpaying taxes. For many companies, modifications to intercompany pricing that reduce taxes payable and utilize losses are overlooked tax savings opportunities.
A multinational company's transfer prices of goods, royalties, services and loans affect where profits are generated, or the losses incurred in each country. For companies impacted by COVID-19, an assessment of estimated taxes payable and losses by country can highlight tax savings opportunities.
Bill Pappas is MetLife's Head of Global Technology and Operations, and is a Corporate Officer and a member of the company's Executive Leadership Team. In this role, he directs a team of more than 38,000 people responsible for technology development, infrastructure, information and cyber security, data strategy and analytics, customer service, operations, crisis management, business continuity and procurement for all lines of business, serving more than 90-million customers across 40+ countries around the world.
Pappas joined MetLife in 2019 from Bank of America, where he was the head of operations for the consumer, small business, wealth management and private banking businesses. In this role, he directed a team comprised of more than 50,000 people delivering integrated service and operations solutions to approximately 63-million consumers and clients. In addition, Pappas led the global business services team that provided integrated technology solutions across Bank of America.
Previously, Pappas was chief information officer for Bank of America's global wholesale banking business, head of global capital markets operations, and head of technology and operations for the Europe, Middle East & Africa, Latin America and Asia Pacific regions. He also served as the global treasury payment operations executive based out of London.
Valerie Song is currently a senior director at Klaros Advisors. She has nearly 17 years of experience as an attorney at the Office of the Comptroller of the Currency, including serving as acting associate chief counsel. She has also advised financial institutions and fintech companies as a senior associate in WilmerHale's Financial Institutions Group.
Justin Tolman is Digital Forensics Evangelist at Exterro. He has over a decade of experience bridging the gap between technical investigation and business strategy and previously served as a computer forensic specialist at the Ohio Bureau of Investigation.
For many cross-border businesses, well-established policies have facilitated the pricing of intercompany goods, royalties, and services transactions over many years. However, even the most robust transfer pricing policies were not designed for pandemic-driven closures. As a result, multinational companies have a high global effective tax rate even when incurring company-wide losses. Paying unnecessary income tax bills is particularly painful for those companies already short on cash.
Tangible tax savings
An example may best illustrate the potential for savings from revisiting transfer pricing policies in the wake of the pandemic. In this situation, a wholly owned manufacturer relies on a sizeable cost-plus margin policy when selling inventory to the parent company.
For a subsidiary in a 30 percent tax rate jurisdiction, a $2 million reduction in transfer prices leads to $600,000 in tax savings by utilizing tax-inefficient parent company losses. Corrections to royalty rates and service fees have similar impacts. The result is the same: utilizing tax net operating losses in Country A while reducing Country B’s taxes. That being said, there does need to be economic substance to justify these changes.
Implementing tax savings
Utilizing tax NOLs in Country A while paying fewer income taxes in Country B is, at first glance, a straightforward concept. However, implementing corrections to transfer pricing often requires some planning. In my experience, senior management on both sides of the border needs to be involved in the decision-making process. Other issues, such as adjustments to Customs entries, are additional complications. Transfer pricing documentation is often well-advised support for changes to transfer prices.
Tax auditors may have questions about why transfer prices have changed. COVID-19 has transformed the global business environment, but preparing support to quantify the pandemic's impact on a company is advisable. Furthermore, making modifications before year-end is less complicated than afterward.
Now more than ever, multinational companies should consider modifications to transfer prices when assessing their global effective tax rate; however, changes to cross-border taxes need to be explained. While there are some complications, cash and tax savings can be well worth the effort.
