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If you’re a private business keen to go global, there’s plenty to think about right now: funding, supply chains, workforce and technology – all of which are covered in KPMG Enterprise’s Going global report.

But perhaps one of the most pressing issues facing any company with international aspirations is their tax strategy. “It continues to be a hot topic,” says Kirsty Rockall, International Tax and Transfer Pricing Partner at KPMG. “Without cracking it, you won’t get far.”

Things are changing in the world of tax. New policies aimed at reducing strategies that involve shifting profits to low tax jurisdictions have the backing of the G20 and focus attention on perceived aggressive tax avoidance.  

Why it matters

The launch of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) shows that tax authorities have become more committed to rooting out perceived tax avoidance and maximising revenues. They’re investing in data scientists and other resources, while subjecting taxpayers to a new level of scrutiny.

More than 100 countries are collaborating on BEPS and each has its own vested interest. Governments across the globe are competing with one another to secure direct and indirect tax revenues from international businesses.

And this is not just an issue for blue chip corporates. “Don’t fall into the trap of thinking it’s something just multinationals or listed businesses should worry about. It could affect your tax bill too,” warns Kirsty. That’s why it’s vital to get a firm handle on how you operate and what that means in relation to transfer pricing (TP).

What is Transfer Pricing?

At its simplest, TP is about making sure that the right profits or losses are allocated and recognised in the appropriate jurisdiction – and taxed accordingly. “It’s important to get on top of it when expanding overseas, as it relates to critical issues such as commercial effectiveness, corporate structure and tax strategy,” comments Kirsty. “And to ignore TP obligations means potentially falling foul of the authorities.”

The way your enterprise operates and the intellectual property (IP) you own has a direct bearing on how you should approach TP. “Your IP might, for instance, be a brand or an innovative piece of technology,” says Kirsty. “Let’s say you legally own it in a relatively low tax jurisdiction. But if all the decision-making about that IP, such as how it is developed and marketed, is made in another higher tax jurisdiction, the argument runs that profits generated by that IP should be recognised in the country where the decisions are made, instead of where legal ownership lies.” Tax authorities are, as never before, focusing on employees’ location and where the decision-making takes place.

How to get it right

If you’re considering overseas expansion, there are many elements to think about in order to get global taxation right. These points in particular need to be considered:

  • What’s the shape of your business and how does it make decisions? If your finance people don’t understand the strategy, they can’t offer meaningful advice on TP policy,” comments Kirsty. Whether you’re running a centralised or decentralised business model has different effects on your tax. The model you opt for also has implications on financing your growth. Do you expand via debt or equity financing? Or through some form of trading arrangement?
  • Know your supply chain, market and customers: it’s tricky to work out the best way to fund expansion until you have a clear view of your supply chain, how you’re selling your products and what all of that means for TP. “Ideally, you want to overlay your funding and treasury arrangements on top of your TP policy,” Kirsty adds.

Keeping a close eye on documentation is increasingly important, too. “Some companies go wrong by not being consistent across the board,” comments Kirsty. “At one company, the corporate communications team was saying that a great global brand and service were essential to driving the business. But a contradictory message was being told around TP. Here the message was that success came down to the prices charged in each market. If it looks inconsistent to the man or woman in the street, just imagine how the tax authorities will view it.”

Key takeaways

  • Transfer Pricing isn’t just an issue for multinationals or listed businesses to be concerned about – it’s critical for any international private business
  • Make sure you’ve given due consideration to the shape and structure of your operations, and how that will affect your tax strategy
  • You need to be joined-up, and have your commercial and finance teams working hand-in-glove

If you want to know more about developing your business globally, download the KPMG Enterprise report below 'Going global' or get in touch with us to talk about your own strategy.

Further information on BEPS

BEPS (Base Erosion and Profit Shifting) is the OECD’s policy response to perceived aggressive tax avoidance by multinational corporations. It is endorsed by the G20 Finance Ministers and Heads of State.

It consists of 15 Actions which address many issues across the tax spectrum, from transparency, to financing, to transfer pricing. BEPS will impact any business that operates in multiple territories.

With BEPS, the OECD aims to clamp down on companies that artificially shift profits to low or no-tax locations.
 

"Don’t fall into the trap of thinking Transfer Pricing is something just multinationals or listed businesses should worry about" Kirsty Rockall, International Tax and Transfer Pricing Partner, KPMG

"It’s critical for your finance function to be close to your commercial operation, working hand-in-glove" Kirsty Rockall, International Tax and Transfer Pricing Partner, KPMG

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