Another section of the survey focused on the compliance costs of transfer pricing and the time spent on transfer pricing requirements. The survey included respon- dents’ estimated costs and time spent managing transfer pricing issues, such as considering transfer pricing methods, creating and translating relevant documents, preparing transfer pricing documentation (master files and/or local files), and completing a country-by-country report or APA and any required updates.
Because transfer pricing is a highly complex issue and, in the case of SMEs, requires the use of tax consultant services that offer a comprehensive solution to address the problem, we seek to estimate the costs and time that are involved in this
others 1%
specific nature of Advance Pricing
Agreements 1%
specific nature of a transfer pricing
audit process
3% exclusion of SMEs from transfer pricing rules or
others 12%
simplified transfer pricing documentation requirements
34%
none 49%
Fig. 3.3 Simplified measurements used by SMEs (compiled by author)
Table 3.2 Simplified measurements used by SMEs (For more details regarding transfer pricing rules and the simplified measurements that SMEs use, see Chaps.2and5) (compiled by author)
Simplified
measurements None
Specific APA
Specific transfer pricing audit process
Excluded from transfer pricing rules or othersa
Simplified transfer pricing
documentation Others
Country HR,
CZ, NL, and SE
NL, LT, DE, FR, and RO
PL and LT PL, HU, EE, FI, FR, EL, IE, LV, LT, and UK
SK, ES, and DE
CZb
aIncludes the exclusion of SMEs from transfer pricing documentation
bIncludes a recommendation for low value-added services
complex transfer pricing issue (see Fig. 3.4) and other specific transfer pricing issues (see Figs.3.5,3.6,3.7, and3.8).
Figure3.4clearly indicates that the average costs for managing complex transfer pricing issues were difficult to estimate for approximately one-third of the respon- dents (SMEs). In addition, the time spent on this issue was difficult for 42% of the respondents to estimate. However, the remainder of the respondents identified how burdensome these issues are.10Approximately one-third of the parent companies and 21% of all respondents (SMEs) spent up to EUR 10,000 per year on transfer pricing issues. Nineteen percent of the subsidiaries spent up to EUR 4000 per year, and 2% of these firms spent up to EUR 22,000 per year. Furthermore, the survey indicated that costs related to transfer pricing issues are more burdensome for parent companies than for subsidiaries. This result may have occurred because parent companies generally administrate most issues related to transfer pricing. For example, they prepare master file transfer pricing documentation and intercompany agreements for intra-group transactions, select transfer pricing methods and per- form controlling functions. The survey revealed that 19% of the subsidiaries spent
27
2
19
1 4
7 8 8
10 14
21
27
0% 5% 10% 15% 20% 25% 30% 35%
more than EUR 22,000 Up to EUR 1,000 EUR 2,001 – 3,000 EUR 4,001 – 5,000 EUR 5,001 – 6,000 EUR 1,001 – 2,000 EUR 3,001 – 4,000 EUR 6,001 – 10,000 I am not able to estimate
16 14
19 19
9 10
12 13
14
42
0% 10% 20% 30% 40% 50%
51 – 100 hours per year 301 – 500 hours per year Up to 50 hours per year 201 – 300 hours per year 101 – 200 hours per year I am not able to estimate
SMEs Subsidiaries Parents
Fig. 3.4 Average costs and time per year spent managing the transfer pricing issue (%) (compiled by author)
10For more details about compliance costs of transfer pricing see Chap.4.
3.2 Compliance Costs and Duration 65
up to 200 or 300 h per year to manage transfer pricing issues, and 16% and 14% of the parent companies spent up to 100 and 500 h (approximately 63 working days), respectively, per year. Globally, the time that the respondents (SMEs) spent on this issue ranged from 50 to 500 h per year.
The survey revealed that if separate transfer pricing issues are considered, the majority of the time and costs needed to manager transfer pricing issues is related to the preparation of transfer pricing documentation. One-quarter of the subsidiaries spent up to 200 or 300 h per year. Twenty-two percent of the parent companies spent up to 100 or 300 h per year on this issue, and 4% of the parent companies spent up to 500 h per year. Globally, approximately one-quarter of the respondents (SMEs) spent up to 300 h per year (approximately 38 working days) and up to EUR 6000 per year on the preparation of transfer pricing documentation. Furthermore, the same amount of costs is borne by almost approximately one-third of the sub- sidiaries in contrast to one-quarter of the parent companies that incurred costs up to EUR 9000 for the preparation of transfer pricing documents. For more details, see Fig.3.6.
29
13 18
25
44
0% 20% 40% 60%
More than 56 hours per year Up to 24 hours per year 25 – 56 hours per year I am not able to estimate
SMEs Subsidiaries Parents
24 27
15 19
24
42
0% 10% 20% 30% 40% 50% 60%
Up to EUR 500 EUR 501 – 1,000 More than EUR 1,000 I am not able to estimate
SMEs Subsidiaries Parents
Fig. 3.5 Average time and costs per year necessary for the selection of the most suitable transfer pricing method (%) (compiled by author)
Regarding other transfer pricing issues, namely, the selection of transfer pricing methods and preparation of a country-by-country report or a similar type of report (Figs.3.5and3.7), the survey revealed that approximately half of the respondents are not able to estimate their time and costs that are related to this issue. Only 10%
of the respondents have used APA; therefore, 86% of the respondents have never used this type of tool and cannot estimate their costs and time (Fig.3.8). However, the remainder of the respondents (one-quarter of the SMEs) reported that they spent up to 56 h per year per transaction and incurred costs greater than EUR 1000 per year while considering the most suitable transfer pricing method. Similarly, regard- ing the preparation of the country-by-country report, 11 and 12% of the respondents (SMEs) respectively spent up to 24 and 56 h per year and incurred costs up to EUR 500 and EUR 1000 per year. In addition, almost one-third of the respondents were
4
22 25
2 4
9
17 18
23 28
0% 5% 10% 15% 20% 25% 30% 35%
301 – 500 hours More than 500 hours No obligation Up to 100 hours 101 – 200 hours 201 – 300 hours I am not able to estimate
SMEs Subsidiaries Parents
14
25 27
30
1 2
9 10
15 20
22 23
0% 5% 10% 15% 20% 25% 30% 35%
EUR 12,001 – 16,000 EUR 9,001 – 12,000 EUR 16,001 – 20,000 Up to EUR 1,000
No obligation EUR 6,001 – 9,000 EUR 1,001 – 3,000 EUR 3,001 – 6,000 I am not able to estimate
SMEs Subsidiaries Parents
Fig. 3.6 Average time and costs per year necessary for preparation of transfer pricing documen- tation (%) (compiled by author)
3.2 Compliance Costs and Duration 67
not obliged to prepare a country-by-country report. However, this situation regard- ing country-by-country reporting will change in accordance with OECD BEPS recommendations and EU activities,11 which will increase the compliance costs of transfer pricing issues.