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.
Maureen Ezekwugo is the Chief Executive Officer of Oggvo, a technology company that is on a mission to help level the playing field between small businesses and big companies that have access to more resources for brand awareness and growth. With more than 20 years of experience, Maureen's career has been dedicated to helping businesses thrive online with products that transform how they market themselves to stand out and connect with today's modern online consumer. As CEO, Maureen is responsible for strategy, culture, vision, growth, and shareholder value at Oggvo.
Maureen has deep experience in driving revenue growth, building high-performing teams, and delivering exceptional customer value in competitive business markets, having served most recently as Chief Customer Officer at RealSelf – the leading online destination for consumers shopping in the aesthetic medicine space - where she led revenue growth, customer operations, and B2B marketing. Maureen is proud of her work with companies in the startup and hyper-growth stages including businesses such as MarketLeader, a software company in the real estate industry, where she helped build a powerful sales force that increased annual revenues from $1M to $100M throughout her leadership tenure.
Maureen also serves as a board member of Ada Developers Academy and as an advisor to multiple startups including BeautyTap and JoyMD. She regularly volunteers with organizations such as the Big Brother Big Sisters of America and enjoys spending her free time traveling, connecting with friends, and relaxing with her family and her cat Sochi.
Tim Hardcastle, CEO and co-founder of Instanda is a highly experienced Board level CIO/COO in FTSE 100 and 250 businesses. His experience managing and leading technology-enabled business change and his determination to consistently exceed outcome expectations led him to lead the development of the entirely new business and service model that is INSTANDA.
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.
