March 2000


A recent survey conducted by Ernst & Young shows that multinational corporations anticipate increased audits as tax authorities intensify their scrutiny of transfer pricing. According to 61% of the respondents, transfer pricing, which involves the costs of related-party transactions, including the intercompany transfer of goods, property, services, loans, and leases, will be the
No. 1 tax issue multinational corporations face over the next two years.

Seventy-five percent of the respondents believe an audit is either very likely or fairly likely, citing transactions involving administrative and management services as most likely to be audited. The biennial Ernst & Young survey polled international tax directors at 582 international parent companies in nine countries and 124 foreign-owned subsidiaries in Europe and North America.

The study shows that multinational corporations are most likely to be audited for transfer pricing compliance in their home country, and secondarily in a neighboring country. Companies doing business in Europe report the highest incidence of transfer pricing audits--74%, compared to 62% in the United States, 64% in Canada, and 21% in Mexico.

Nearly two-thirds of the companies surveyed believe they could minimize their overall tax burden if tax and transfer pricing considerations were fully integrated with business decision-making, but only 30% include it in their strategic planning.

The most important goal of transfer pricing policies, according to survey respondents, is maximizing operating performance, not optimizing tax arrangements. Documentation in preparation for a possible audit is the second most frequently cited factor. *

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