Merger and acquisition (M&A) deals tend to increase the complexity of the legal entity structures, introduce new related party transactions, and drive significant changes in the global supply chain, observe the Deloitte professionals in ‘Transfer Pricing Law and Practice in India: A fine print analysis,’ second edition (www.cchindia.co.in).
“Supply chain changes common to many M&A deals include supplier consolidation, manufacturing capacity rationalisation, sales force integration, product line rationalisation and geographic expansion. Addressing the transfer pricing implications of such changes is something that must be managed proactively and persistently.”
The authors rue that often during the due diligence phase of a cross-border M&A transaction, inadequate attention is paid to target entity’s transfer pricing policies, planning and documentation.
They advise, therefore, that the go forward transfer pricing team must aggressively pursue and document all legacy knowledge and insight into historical transfer pricing practices. “In light of increasing scrutiny from tax authorities around the world, transfer pricing is an area of potential unrecorded liability that often warrants significant review during due diligence.”
A section on FIN 48, in a chapter titled ‘recent developments,’ speaks about the Financial Accounting Standards Board (FASB) Interpretation No. 48, which has changed the way MNCs look at uncertain tax positions.
“A tax position is a filing position that an entity has taken or expects to take on its tax return. Therefore, if an entity believes that the tax treatment of a certain transaction is uncertain, a FIN 48 analysis is required to address such issues.”
A tax position can result in a permanent reduction of taxes (permanent differences), a deferral of taxes (temporary differences), or a change in the expected realisation of deferred tax assets (tax planning strategies), the authors explain.
They inform that FIN 48 is applicable to non-US based enterprises that issue financial statements based on, or reconciled to, US generally accepted accounting principles (GAAP); foreign subsidiaries of US entities; and non-US entities registered with the Securities Exchange Commission (SEC).
Among the typical scenarios under which FIN 48 becomes important are the following: Decision not to file a tax return in a particular jurisdiction for which the return might be required; allocation or shift of income between jurisdictions (e.g. transfer pricing); and classification of a transaction in a tax return as tax exempt, for example, asserting that a particular equity restructuring is tax-free when that position might be uncertain.
Transfer pricing by its very nature is uncertain; it is an art and an inexact science, requiring the application of flexibility and judgment, the authors note. With the introduction of FIN 48, they caution that the administrative burden of the taxpayer has substantially increased.
“FIN 48 will require management and external advisors to evaluate material uncertain tax positions, which for many organisations will be an extensive exercise and will significantly increase their documentation requirements.”
Imperative addition to the international tax professionals’ shelf.
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