[IMGCAP(1)][IMGCAP(2)]The Organization for Economic Cooperation and Development, together with its Global Forum members, is intent upon providing transfer pricing tax risk assessment assistance to tax administrations.

Knowledgeable CPA firms that understand this tax risk assessment regime can benefit from applying enumerated and replicating transfer pricing assessment processes for its clients. Alternatively, the CPA firm could seek to replace its tax administration activities. In either situation, CPA firms might seek to obtain these benefits as being a cost center or a profit center.

The OECD and its member countries are seeking to tax multinational enterprises in a more effective manner than in the past. These members are developing transfer pricing audit mechanisms to achieve that efficiency objective. The OECD now realizes the risk assessment objective is more difficult than originally contemplated.

The OECD realizes it reached a transfer pricing stumbling block because member tax administrations lacked the knowledge to thoroughly audit their multinational enterprises. The OECD is now working on an alternative to this limitation. The members are helping member countries undertake their own transfer pricing risk assessment process, knowing that process is more cumbersome than initially contemplated.

Business Opportunities
The OECD issued the draft transfer pricing risk assessment package in April 2013, and its analysis is near completion. CPAs and their coordinate transfer pricing specialist firms appear to have two divergent but distinct business opportunities:

1. The CPA firm could establish mechanisms to better track the tax administration’s transfer pricing risk analysis of its multinational enterprise client base.

2. The CPA firm could replace the tax administration’s role in undertaking the transfer pricing risk assessment process; and, if the law permits, bid for this opportunity.

We suggest CPA firms can develop a strong position in tracking a client enterprise’s transfer pricing risk assessment activities. The CPA firm could apply transfer pricing related strategies by reverse engineering the transfer pricing process, undertaking in-depth industry studies for their business segments, and applying financial analytical techniques. The CPA might want to consider three planning options:

1. Take advantage of scalar economies and offer these services to existing multinational enterprise clients.

2. Poach business from other CPAs who fear to tread into this multinational business opportunity.

3. Coordinate with a transfer pricing specialist firm.

It is often cumbersome for a tax administration to develop transfer pricing risk assessment functions. Tax administrations should consider relying on private sector accounting firms to achieve this transfer pricing objectives. In our view, CPA firms and transfer pricing specialist firms are better positioned to conduct the transfer pricing risk assessment process for the tax administrations.

Understanding the Transfer Pricing Risk Assessment Process
Activities that a multinational enterprise conducts potentially might cause an enterprise to face transfer pricing risks for countries within its purview. The OECD Global Forum recognizes that each tax administration operates only with finite resources. No country has the enforcement resources to perform thorough transfer pricing audits affecting every potential situation.

The OECD recognized that tax administrations needed help in selecting the right transfer pricing for audit. The draft transfer pricing risk assessment handbook assembles recent country procedures, methods and practices to enable the tax administration to develop its own transfer pricing risk assessment approaches.

A tax administration contemplating setting up a multinational enterprise transfer pricing audit might require many inputs. This analysis is likely to involve the client company’s data files, specific attention by many auditors, foreign travel, site visits, analysis of the enterprise’s financial and economic data, extensive knowledge of the enterprise’s business and those of its competitors, and involvement by transfer pricing experts, to examine just a few considerations.

Tax administrations need to be careful in marshaling their resources as they undertake a transfer pricing audit. In short, tax administrations themselves face transfer pricing risks. The question then arises as to whether the tax administration can shift this audit assessment risk to private sector professionals, and if so, which professional segment would be most valuable to the tax administration.

Multinational enterprises will need to consider many factors in determining to partner with a transfer pricing specialist firm, and then to select a transfer pricing specialist firm. We expect a multinational enterprise to consider a transfer pricing specialist firm’s expertise, efficiency, reputation and costs before agreeing on the contractual terms.

Transfer Pricing Risks and Functions
A CPA firm conducting a transfer pricing risk analysis process on behalf of a multinational enterprise client normally would undertake a comprehensive review of the enterprise’s functions and risks. Such activities might include the following 10 categories:

1. Recurring transactions taking place among members of the group, focusing on repetitive smaller transactions of the enterprise;

2. Large, complex or one-time transactions between members of the enterprise group;

3. The enterprise’s non-compliance history;

4. Financial results that differ from the enterprise’s industry results;

5. Actions under which the enterprise shifts income toward low-tax jurisdictions;

6. Whether the enterprise’s activities reflect recurring losses, recurring low profits, or low return on investment;

7. Ascertaining whether intra-group services shift profits to tax-favored entities;

8. The nature and extent of royalty fees, management fees and insurance premiums;

9. The presence of excessive debt within the corporate group; and

10. The presence of intangibles shifted to or from related parties.

Transfer Pricing Risk Assessment Retainer Agreements
A CPA firm contemplating arranging a transfer pricing risk assessment relationship with a multinational enterprise might consider the following facets:

1. What specific risks does the CPA firm undertake when it establishes a transfer pricing risk assessment retainer agreement with a multinational enterprise?

2. What success parameters should the retainer agreement address regarding the transfer pricing risk assessment process?

3. What remedies would the multinational enterprise have if it does not like the finished product?

4. Should the transfer pricing risk assessment retainer agreement specify a standard of care and responsibilities?

5. What remedies should apply if the tax administration rejects or modifies the transfer pricing risk assessment?

6. How does a CPA undertaking a transfer pricing risk analysis interface with the CPA firm that has responsibility for the audit?

Both CPA firms and transfer pricing specialists need to be cautious when entering into transfer pricing risk assessment arrangements. Rarely, but in some situations, a CPA firm might be viewed as the perpetrator of a multinational enterprise’s aggressive tax behavior, including deliberate income shifting or worse. Such a transfer pricing risk arrangement mechanism might cause an uncomfortable arrangement for the CPA firm and the client, reflecting bad behavior to the tax authorities.

Robert Feinschreiber and Margaret Kent are attorneys and counselors with TransferPricingConsortium.com.

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