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PAYROLL ON POINT | NOVEMBER 2019
MANAGING TRANSFER PRICING RISKVIA PAYROLL
Payroll can be a very important source of contemporaneous information about a groups transfer pricing risks. It can help provide early indication of changes to a group’s operating model which will typically trigger a requirement to revisit the transfer pricing applied by the group. THE BASICS Most countries apply transfer pricing in their corporate tax regimes. The rules require that global multi-nationals pay tax according to the economic activity conducted in a country. The analysis of the pricing of transactions between the local company and other companies in the international group (their ‘transfer pricing’) will often be guided by the people functions of an organisation: who does what and where is key in assessing where income and costs should sit within a global group for corporate tax purposes. We have seen an increase in HMRC transfer pricing (TP) enquiries and challenges to the allocation of profit within global corporate groups. Failure to comply with TP requirements can result in: X X Negative corporate tax adjustments X X Tax geared penalties X X Interest on late tax payment X X Prolonged HMRC enquiry process resulting in ongoing tax uncertainty
HOWCAN PAYROLL HELP IN MANAGING TRANSFER PRICING RISK? People are usually the most important asset of any business. Payroll activity can provide an immediate indication of changes to a business which could have significant TP implications. Early identification of changes to a group‘s operating model will normally allow a more considered TP policy and better manage the corporate tax risk. For example: X X New international payrolls being run by a group will be evidence of expansion overseas. This will nearly always require TP consideration from a corporate tax perspective X X A large increase in staff numbers could be an indication that a new business line has been established or significant expansion has resulted in operating model changes X X Significant changes to bonus policy and bonus payments could be an indication of a change in business activity or business operating model X X Multiple country payrolls for an individual could be indication of a mobile employee who spends time working for the benefit of an overseas company X X The addition of new directors fees which relate to overseas companies X X Tax equalisation payments going through payroll will usually be evidence of international secondments or assignments. This activity can result in TP implications. If changes in payroll activity fall into any of these categories there may be a need for your business to revisit its TP assumptions and model. BDO has the breadth of expertise and capability to broadly assist with managing the tax risk arising from business change. To discuss any of the issues raised above, please contact paul.daly@bdo.co.uk or ben.henton@bdo.co.uk .
and requiring groups to commit significant internal resource until resolution.
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