Business leaders welcome increased focus on transfer pricing clarity

New research from the Grant Thornton International Business Report (IBR) reveals that business leaders are much more comfortable with levels of cross-border tax planning guidance compared with 12 months ago. Providing greater certainty around transfer pricing was high on the agenda at Davos and remains a key issue for the G20, but the good news for businesses is a number of exercises are underway to establish greater clarity and transparency.

The IBR reveals that the proportion of business leaders who would welcome more global co-operation and guidance from tax authorities on what is acceptable tax planning, even if this provided less opportunity to reduce tax liabilities across borders, has dropped 15 percentage points to 53%. Large declines were seen in North America (-16pp) and the EU (-15pp) as well as in BRIC (-15pp) and Asia-Pacific (-11pp) economies.

Pallavi Bakhru – Director, Grant Thornton Advisory Private Limited, commented: “It is almost a year since the level of corporate tax that multinationals like Amazon, Vodafone, Google and Starbucks are paying hit the headlines. At that time, around two-thirds of business leaders were calling for clarity around the operation of specific tax rules, but twelve months on this has now dropped to just half. The question is why?

“I think we’re looking at a combination of factors. Media attention has certainly died down over the past year and businesses may feel that the social pressure has lessened. There may also be a sense among corporations that governments are prepared to offer populist rhetoric but actually change very little; after all, these large companies are massive contributors of jobs and economic growth.

“But perhaps the most important factor is that global leaders have listened to the concerns of citizens around the levels of tax paid by multinationals. A number of exercises are underway to establish greater transparency and clarity; for example, the OECD has been given a mandate by the G20 economies to prevent tax base erosion and profit shifting (BEPS) through reform at the global level.”

The IBR also reveals that the vast majority of businesses leaders globally (64%) do not feel their country’s tax laws and policies tax the correct people at the correct levels. A further 54% do not feel that their tax system encourages compliance. In comparison, India fares slightly better than the global average on these two fronts:

  • about 45% business leaders in India do not feel their country’s tax laws and policies tax the correct people at the correct levels
  • 44% do not feel that their tax system encourages compliance

The concern for Indian business leaders (74%) is that the current tax laws do not bring enough economic participants into the tax base, which is way above the global average of 43%.

Pallavi added: “The results show there is a long way to go before business leaders feel truly comfortable with the tax planning guidance on offer. But I think the smartest business leaders have taken advice and properly insulated themselves against any negative impact on their brand. This makes sense: it would be a mistake to think that tax avoidance issues are over; to see it merely as a 2013 phenomenon.

The IBR also asked business leaders for their strategic priorities in 2014; reducing their tax bill was cited by 35% of businesses and ranked tenth out of thirteen, well behind increasing productivity (70%), increasing market share (65%) and cutting costs (64%).