Supporting Tax Officials in The Time of Coronavirus (COVID-19): Virtual PCT Workshops on Transfer Pricing Comparables
The fight against Coronavirus (COVID-19) is transforming social norms and practices dramatically around the world. Social distancing, staying-at-home and work-from-home are now global norms. These new norms are disrupting old ways of conducting business with a need to adopt digital solutions quickly. PCT’s three recent workshops on transfer pricing and comparables data were no exceptions: All workshops went virtual to be able to connect with tax officials from around the world.
What made tax officials attend these highly technical workshops in increasing numbers during a global pandemic? Transfer pricing has emerged as one of the most challenging issues for tax authorities over the past years and tax officials are keen to know practical approaches and solutions.
A transfer price is a price employed in a transaction between ‘related parties’, that is enterprises controlled by the same owner. Multinational enterprises have related parties in different countries. Transfer pricing is a necessary part of commercial activities of multinational companies. It is also a legitimate part of their operations, as long as transfer pricing is practiced in compliance with internationally applicable rules. But sometimes multinationals may exploit differences in tax systems between countries through manipulative and abusive transfer pricing that shifts profits from high to low tax jurisdictions. Such profit shifting denies countries essential tax revenues and damages the legitimacy and credibility of tax systems.
At a time when countries need additional domestic resources to overcome the health, economic and social impacts of Coronavirus on their citizens, protecting domestic tax bases and strengthening tax systems have become more important than ever. The high demand for these virtual courses is also a useful indication of the fact that the tolerance for tax avoidance resulting from such profit-shifting is at an all-time low in emerging markets and developing countries. The useful guidance presented through these workshops directly impacts on tax officials’ ability to stop profit shifting and to collect the revenues due them at this time of acute revenue shortages.
Originally planned as a face-to-face event in Ankara, Turkey, the first virtual workshop on “The Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses” took place on March 16-17, 2020. The workshop was delivered by transfer pricing experts from PCT Partners with organizational support from the OECD Global Relations and Development team and the PCT Secretariat. Close to 70 senior level tax officials from developing countries attended the two-day workshop to learn more about options to overcome the lack of data for transfer pricing analysis. The participants were so interested in the topic that nothing could prevent them from following the workshop, including inconveniences of working from home and participating in discussions at odd hours due to different time zones.
A follow-up workshop, held on April 29-30, 2020, covered the remaining topics from the first workshop. This second workshop also addressed topics of interest raised by the participants after the first workshop. It allowed more interaction between participants in digital break-out rooms where they discussed select case studies in smaller groups. The PCT also supported a Russian version of the toolkit workshop with 115 participants connected from Russia, Belarus, Ukraine, Kazakhstan, and Uzbekistan at all times for three days on April 21-23 2020.
The three virtual workshops allowed participants to familiarize themselves with the content of the PCT toolkit, which specifically addresses the ways the countries can access data to implement transfer pricing rules. During virtual classes, participants discussed real-life scenarios and issues that they encounter in the context of transfer pricing, while instructors from PCT Partners shared their views and suggestions on how to address them. In one participant’s words: “The workshop highlighted some issues that are common, helped us find solutions and called our attention to new facts, new approaches”. Learning activities continued outside the virtual classrooms as instructors stayed in touch with participants to follow up on their questions.
Comparability pricing analysis and data come into the picture when countries need to implement transfer pricing rules to minimize profit shifting and ensure appropriate allocation of tax base to the jurisdictions where the value is created. Under transfer pricing regimes, tax authorities need to accurately delineate transactions between related parties, analyze and price them in terms of what related parties would do if they were independent parties in comparable situations. It is the cornerstone of application of transfer pricing rules, but at the same time difficult to implement in the real world.
To carry out the comparability analysis, countries need reliable data on comparable transactions. However, many tax administrations experience challenges in their ability to access such data or see a small number of comparables in their own countries. The absence of comparable data can be addressed by various approaches ranging from the more obvious – such as increasing the availability of the publicly accessible comparable data by requiring public disclosures of financial statements – to not so obvious approaches. Based on the guidance from the toolkit, PCT experts showed workshop participants how to design some of the less-known approaches through practical examples.
The challenges that tax authorities face daily are complex. With restrictions on international travel, PCT’s virtual workshops have become essential in sharing knowledge and experience on important topics in taxation such as medium-term revenue strategies (MTRS) and other PCT toolkits on international taxation. Moreover, this type of interactive events is useful and beneficial to complement the toolkit with real country experiences and good practices in a timely manner. The interest and enthusiasm of participants in the workshops show the viability and usefulness of virtual classrooms and its power in bringing together substantive dialogue based on developing country perspectives and cases.
As the impacts of COVID-19 pandemic deepen in countries, PCT will continue to support tax officials and tax administrations on relevant topics that help raise domestic resources efficiently and equitably. To get timely news on upcoming toolkits and virtual workshops, please sign up for our newsletter HERE.
The authors are grateful for valuable comments and contributions received from PCT Partners’ respective technical staff.