More than three-quarters of oil and gas finance executives said transfer pricing was the most important tax issue they are facing, according to a survey by Ernst & Young.
The firm found that 95 percent of oil and gas finance executives ranked transfer pricing—the pricing of goods, intangibles, financial instruments and services transferred within an organization —as very important or fairly important. Seventy-six percent said transfer pricing was the most important tax issue they are dealing with, followed by tax minimization and double taxation. Eighty-four percent of respondents feel that a transfer pricing audit is fairly likely or very likely. The survey included independent interviews of 58 high-level (CFO to controller) energy executives last year.
Even with an improving global economy, governments facing daunting deficits remain focused on raising revenues through taxation, with transfer pricing being a key instrument. For oil and gas companies, the countries or regions with a highest propensity to audit transfer pricing are: Australia, Brazil, Canada, China, Germany, India, Indonesia, Malaysia, Norway, Singapore, Thailand, the U.S. and the U.K.
Many oil and gas companies sell goods and services across borders which can be easily documented with the use of oil indices. These transactions tend to see less controversy due to the availability of third party pricing. It's the more difficult-to-measure items like services, financing and intangibles that tax authorities are scrutinizing.
In response to increased scrutiny, oil and gas companies are putting more effort into documentation and approaching it with a mindset that compliance documentation will eventually end up in the hands of tax authorities. Documentation is also becoming more of a centralized function, managed by the parent company or a regional hub. This uniformity creates consistency across countries and entire regions and ultimately simplifies compliance and reporting.
Also, in an effort to streamline processes and reduce the overall manpower devoted to this increasingly crucial effort, larger numbers of oil and gas companies are applying for Advanced Pricing Agreements. The APA process allows a company to lock in a methodology, pricing structure and results for a set number of years between two or more taxing authorities. This helps to resolve or prevent disputes for the specified period. In these agreements, the concerned tax authority agrees not to seek a transfer pricing adjustment for a covered transaction.
