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.
President and CEO Jill Castilla led a 180-degree turnaround at Citizens Bank of Edmond through her approach to Fintech and social media. She changed the story of the Bank from one of near collapse and failure to one of great success and innovation. Jill has told the story of the turnaround at conferences nationwide and to 5,000+ people in various industries. Jill broke virtual radio silence through the power of social media by leading the bank from having no audience to more than 30,000 followers who engage with the Bank through Twitter, Facebook, YouTube and Instagram. Jill was named “Most Admired CEOs in Oklahoma"; “Most Innovative CEOs in Banking”; "Community Banker of the Year"; and "Most Powerful Women in Banking" in 2015. She ranks #1 on ICBA’s list of Twitter influencers. Citizens’ community appreciation event implemented by Jill, “Heard on Hurd,” had more than 100,000 attendees in 2015 and generated more than $2.4 million in economic activity. Jill previously served in the U.S. Army and Oklahoma Army National Guard as a construction and civil engineer. Prior to joining Citizens Bank, she was at the Federal Reserve Bank of Kansas City and with a community bank in Minnesota. Her academic background includes a Master’s degree in Economics from the University of Oklahoma and she is a graduate of the University of Wisconsin-Madison’s Graduate School of Banking. Jill is a distinguished alumna of Hawaii Pacific University.
Michael Rosenberg is president of ai2hr.com.
Maiclaire Bolton Smith holds the position of senior leader, research and content strategy at CoreLogic. In this role, she leads the thought leadership team for the insurance division and works with the enterprise thought leadership team to reveal new insights about climate to the broader property ecosystem.
Prior to CoreLogic, Bolton Smith held previous positions at RMS, Emergency Management British Columbia, the International Seismological Centre and the Geological Survey of Canada. She is a seismologist by trade. She earned her bachelor’s in geophysics from the University of Western Ontario and her master’s in geophysics, specializing in earthquake seismology, from the University of Victoria.
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.
