Page 11 - THE SOUTH CHINA BUSINESS JOURNAL
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professionals at multinational companies investigations, costly special tax adjustments (large
(MNCs) often review their related party taxation adjustments, additional fines, and interest
transactions at the end of the fiscal year. payments), as well as stricter monitoring from the
This helps them see whether the related party tax authorities.
transactions within the group are in line with the
arm’s length principle, and whether they meet the Given these consequences, many MNCs opt to
transfer pricing regulations where they operate. review and adjust their transfer pricing results
periodically, ideally on a monthly or quarterly
When deviations are found in the review, basis. While this practice helps mitigate risks, it is
professionals will voluntarily make precautionary associated with operational challenges.
adjustments to minimize the risk of being
investigated by the tax authorities. This is called An MNC that wants to maintain up-to-date
transfer pricing year-end adjustment. transfer pricing information must be prepared
to coordinate information requirements across
Why year-end adjustments are multiple departments and often multiple offices.
needed This increased level of communication is difficult
to achieve and maintain; year-end adjustments may
There are many reasons why a company’s become necessary to account for any deviations.
operation might fall outside of the arm’s-length
range. In most cases, it is neither deliberate nor Given these circumstances, and the additional
an oversight. costs created by a more responsive transfer pricing
postures, many MNCs treat periodic transfer
The BEPS Action Plan has encouraged increased pricing evaluations with priority and year-end
transfer pricing scrutiny from tax officials across adjustments as an important safeguard. These
the world. This, in turn, has encouraged MNCs to approach significantly reduces an MNC’s exposure
pay more attention to transfer pricing compliance. to transfer pricing risks brought about by market or
Accordingly, most MNCs regularly conduct transfer business variables.
pricing analysis to develop systematic transfer
pricing strategies at the group level. This helps How to make transfer pricing year-
ensure that transactions between related parties end adjustment
can obtain reasonable profits without violating the
arm’s length principle or country-specific transfer Generally, MNCs employ third party professionals
pricing rules. to assist in making year-end adjustments.
Third party professionals are well-placed to
However, in actual practice, many legitimate independently assess deviations in transfer pricing
factors that may cause a company’s final profit execution results, and objectively calculate the
level to deviate from the arm’s length results. amount that should be adjusted based on proper
For example, the profit level of an enterprise can transfer pricing methods.
change quickly, causing an unexpected deviation,
following market fluctuations. While internal Beyond these basic concerns, third party
procedures can always be tightened to improve professionals can advise the most practical methods
responsiveness, the deviation may still bring for achieving the adjustments based on an MNC’s
potential transfer pricing risks to the company that scope and situation. While the year-end adjustment
necessitate adjustments. is ultimately carried out by the internal financial
team, third party advisory often saves time and
A failure to respond to deviations carries resources while executing an adjustment.
stringent consequences, including special tax
SOUTH CHINA BUSINESS JOURNAL 9
(MNCs) often review their related party taxation adjustments, additional fines, and interest
transactions at the end of the fiscal year. payments), as well as stricter monitoring from the
This helps them see whether the related party tax authorities.
transactions within the group are in line with the
arm’s length principle, and whether they meet the Given these consequences, many MNCs opt to
transfer pricing regulations where they operate. review and adjust their transfer pricing results
periodically, ideally on a monthly or quarterly
When deviations are found in the review, basis. While this practice helps mitigate risks, it is
professionals will voluntarily make precautionary associated with operational challenges.
adjustments to minimize the risk of being
investigated by the tax authorities. This is called An MNC that wants to maintain up-to-date
transfer pricing year-end adjustment. transfer pricing information must be prepared
to coordinate information requirements across
Why year-end adjustments are multiple departments and often multiple offices.
needed This increased level of communication is difficult
to achieve and maintain; year-end adjustments may
There are many reasons why a company’s become necessary to account for any deviations.
operation might fall outside of the arm’s-length
range. In most cases, it is neither deliberate nor Given these circumstances, and the additional
an oversight. costs created by a more responsive transfer pricing
postures, many MNCs treat periodic transfer
The BEPS Action Plan has encouraged increased pricing evaluations with priority and year-end
transfer pricing scrutiny from tax officials across adjustments as an important safeguard. These
the world. This, in turn, has encouraged MNCs to approach significantly reduces an MNC’s exposure
pay more attention to transfer pricing compliance. to transfer pricing risks brought about by market or
Accordingly, most MNCs regularly conduct transfer business variables.
pricing analysis to develop systematic transfer
pricing strategies at the group level. This helps How to make transfer pricing year-
ensure that transactions between related parties end adjustment
can obtain reasonable profits without violating the
arm’s length principle or country-specific transfer Generally, MNCs employ third party professionals
pricing rules. to assist in making year-end adjustments.
Third party professionals are well-placed to
However, in actual practice, many legitimate independently assess deviations in transfer pricing
factors that may cause a company’s final profit execution results, and objectively calculate the
level to deviate from the arm’s length results. amount that should be adjusted based on proper
For example, the profit level of an enterprise can transfer pricing methods.
change quickly, causing an unexpected deviation,
following market fluctuations. While internal Beyond these basic concerns, third party
procedures can always be tightened to improve professionals can advise the most practical methods
responsiveness, the deviation may still bring for achieving the adjustments based on an MNC’s
potential transfer pricing risks to the company that scope and situation. While the year-end adjustment
necessitate adjustments. is ultimately carried out by the internal financial
team, third party advisory often saves time and
A failure to respond to deviations carries resources while executing an adjustment.
stringent consequences, including special tax
SOUTH CHINA BUSINESS JOURNAL 9
