cost of transfer pricing

For older tax practitioners, it probably is easy to recall that one of the tax maxims is that tax compliance should not be overly taxing and onerous on the taxpayers. Ideally, tax should not carry additional cost beyond what is required in the ordinary course of business. As far as possible, it should be a fairly easily quantifiable sum with sufficient certainty.

Yet, in the present era of transfer pricing compliance, businesses, particularly multinationals are required to prepare lengthy transfer pricing documentation not unlike an annual report, which I daresay, like annual reports, a lot of the print is hardly read or appreciated. These documentation require specialists in the field to prepare and which contributes nothing to the businesses and in many cases produce end results that are at best a ballpark figure and at worse, a wild guess.

In that backdrop, it seems odd that there is a global trend for collecting tax based on transfer pricing documentation. This trend should be reviewed. Is it just about collecting some taxes? Do businesses really think the transfer pricing exercise helps them understand what the true transfer price is between them and their related parties. Is it a case of the tax authorities wanting to collect more taxes and the businesses playing along, simply because a business' true costing for its pricing whether related or otherwise could never be revealed for obvious reasons vis a vis its competitors.

If it is really just a matter of collecting taxes, shouldn't the OECD and the tax authorities gather and reconsider a way to collect taxes, which does not require businesses into revealing its true costing for its pricing potentially threatening its business core, nor does it depend on broad economic theories, not unlike the concept of efficient market hypothesis which carried so much weight in the 80s only to be shot down in more ways than one in the 90s in that can markets ever be efficient or is it inevitably affected by noise. Let's get real, theories are theories. Businesses succeed or fail for reasons only peculiar to itself and no one else. For instance one keyman falling sick could potentially bring a multinational down. How can there be true comparables, even if there is another company selling exactly the same product type when so much goes beyond just the product, such as marketing. More so when the global economy face challenging times, every business will undertake measures of its own to cope in order to survive. Can corporate decisions be dissected into its components just by looking at its public financial records in order to compare similar factors like working capital levels, inventory levels etc.

Tax collection is about taking money from taxpayers. It can only be constitutionally appropriate if the laws which provide for the tax is clear and unambiguous. Can the laws be clear and unambiguous in the context of transfer pricing if such laws or rules require some mathematical extrapolation based on some economic theory on pricing in order to arrive at the tax liability.

Countries like Malaysia new in attempting to compete in the global arena ought to take a step back to see if they would truly want to jump into the play 'which the rich can afford to play'. One wrong tilt of the dice could mean a company closing down its business in Malaysia and that would mean loss of jobs. Malaysia is also not a high income country that is generating huge profits for multinational corporations for it to be easily replaced as a location. But that is digressing, the issue should focus on whether such an exercise is productive or merely a waste of corporates time and money when much focus should be placed on productive income generation, just so the taxman can collect its dues.

If it is about collecting tax revenue, would it not be easier to just ask for contributions similar to cess. Contributions can simply be based on turnover, agreeing on an affordable rate for businesses to pay. Take it out of the tax legislation and appeal to the corporate social responsibilities of corporates. After all it is at best a ballpark sum. The difference is it makes everyone feel empowered and happy with what they are contributing. Multinationals feel welcome to operate in Malaysia just by making contributions to the country's tabung. Malaysia then is truly boleh.