E&Y latest survey of tax directors and international tax professionals about Transfer Prices.

1. 2010 Global Transfer
Pricing Survey
Addressing the challenges
of globalization

2. Contents
Introduction 1
Executive summary 2
Key trends in global taxation and transfer pricing 5
Insights from the survey 7
Transfer pricing still dominates the tax agenda 7
Companies are paying closer attention to documentation 9
The risk of audit is rising ... 11
... as the controversy management tool chest is growing 12
Transfer pricing rules are in flux 13
Restructuring efforts and the pursuit of a more tax-efficient
supply chain are becoming more complex 15
Conclusion 18

3. Country-specific findings from the survey 20
Americas Asia-Pacific EMEIA
22 Argentina 28 Australia 34 Belgium 42 Netherlands
23 Brazil 29 China 35 Denmark 43 Norway
24 Canada 30 Japan 36 Finland 44 South Africa
25 Mexico 31 New Zealand 37 France 45 Spain
26 United States 32 South Korea 38 Germany 46 Sweden
39 India 47 Switzerland
40 Ireland 48 United Kingdom
41 Italy
Methodology 49
Glossary of terms 52
Ernst & Young Transfer Pricing country contacts 54

4. Introduction
Transfer pricing remains a key tax challenge for the world’s leading companies. That’s the
major observation from our latest Ernst & Young survey of tax directors and international
tax practitioners.
And with good reason. Faced with a slowly recovering global economy and record
deficits, governments are increasingly focused on raising revenues through taxation. As a
result, more and more jurisdictions are ramping up their enforcement efforts — not only
in developed nations but also in many emerging markets such as China, India, Russia
and Brazil.
At the same time, the Organisation for Economic Co-operation and Development (OECD),
whose work largely defines the transfer pricing rules adopted by member nations, continues
to refine and update its transfer pricing guidelines. In 2010, among other initiatives, the
OECD issued a thorough update of its guidance on comparability and profit methods.
For 2011, the OECD is shifting its transfer pricing focus to better defining the issues
surrounding intangibles such as trademarks, patents and even business models. The OECD
will be issuing guidance, hopefully within the next few months, that will form the basis of
many governments’ attitudes in dealing with these difficult subjects.
This year also saw the publication of the OECD’s new chapter on business restructurings
and its new report on the attribution of profits to permanent establishments. Most global
businesses, in the face of mounting pressure to improve profitability, have been undertaking
some form of cost reduction or business change program. In many cases, this process
includes substantial changes to everything from strategic planning to supply chain. Each
and every business change brings with it transfer pricing implications.
Since 1995, Ernst & Young has surveyed multinational enterprises (MNEs) on international
tax matters with special emphasis on what continues to be a leading international tax
issue — transfer pricing. The ever-increasing scope of our transfer pricing research reflects
the growing number of countries that devote attention to transfer pricing. This is noted
through increased enforcement and regulatory activity, as well as the increasing variety of
transfer pricing issues facing MNEs.
For this survey, we commissioned Consensus Research International to conduct a series of
independent interviews of 877 MNEs across 25 countries. The resulting report summarizes
the transfer pricing practices, perceptions and audit experiences of a wide range of global
corporate tax practitioners. The survey provides insights into how MNEs are dealing with
the myriad of economic, regulatory and fiscal changes taking place around the world. For
the first time, our survey queries MNEs on their business restructuring activities, an area in
which many of our clients express keen interest.
We trust that you will find our 2010 Survey results, together with our insights and
recommendations, useful and informative. In our view, there is no question that transfer
pricing will remain one of the most important tax issues over the next few years and that
tax authorities will continue to increase their focus in this area. Every business needs to be
well-prepared for the coming challenges as enforcement efforts will undoubtedly increase
significantly.
John Hobster Thomas Borstell
Head of Global Accounts Global Director
Transfer Pricing Transfer Pricing Services
1 2010 Global Transfer Pricing Survey

5. Executive summary
Importance of transfer pricing
Transfer pricing is one of the key tax issues today — it is actually more
important today than it was two years ago.
Audit experiences
Transfer pricing audits are increasing in significance, intrusiveness and
scope.
Controversy management
Litigation remains infrequent — but is on the rise. Meanwhile, the use of
and degree of comfort with APAs are increasing — while experience with
new arbitration processes remains extremely limited.
Trends in transfer pricing issues and approaches
Enforcement actions are placing greater emphasis on intercompany
financing transactions and service transactions.
Taxpayer approaches
Taxpayers are taking a more coordinated and globalized approach
to transfer pricing documentation.
Tax and efficient supply chain management
Tax considerations relating to business restructuring are expected to
become more important in the coming years.
Addressing the challenges of globalization 2

6. Importance of transfer pricing Audit experiences Controversy management
Transfer pricing is one of the key tax Transfer pricing audits are increasing Litigation remains infrequent — but
issues today — it is actually more in significance, intrusiveness and is on the rise. Meanwhile, the use of
important today than it was two years scope. and degree of comfort with APAs are
ago. increasing — while experience with
new arbitration processes remains
extremely limited.
• 74% of parent respondents believe • Two-thirds of respondents have • 23% of parent respondents use
that transfer pricing documentation undergone an audit in the 2010 advance pricing agreements (APAs)
is more important now than it was Survey, compared with only 52% in as a controversy management tool.
two years ago. the 2007 Survey.
• The level of satisfaction with APAs
• 32% of all respondents identify • 1 in 5 audit adjustments triggered a as a controversy management tool
transfer pricing as one of the most material penalty, compared with 1 in is high: 90% of those who have used
important tax challenges facing their 25 in 2005. them would do so again.
group.
• Parent respondents report that • Only 18% of all respondents have
• 74% percent of parent respondents tax authorities requested access referred a transfer pricing dispute
and 76% of subsidiary respondents to intercompany agreements and to a competent authority in the last
believe that transfer pricing will operational personnel in 73% and 41% three years.
be “absolutely critical” or “very of examinations, respectively.
important” to their organizations • The emerging option of binding
over the next two years. • Emerging markets are coming to arbitration has yet to be adopted by
the forefront of audit activity. The a significant number of respondents.
number of parent respondents Only 2% of all respondents indicate
indicating they had undergone a making use of binding arbitration.
review in India increased from 6%
in 2007 to 11% in 2010, while the • Globally, litigation remains an
number undergoing a review in China infrequent but increasing method of
increased from 4% to 12%. dispute resolution, with 10% of all
respondents indicating that they have
litigated a transfer pricing matter
in the last three years, compared to
only 3% in the 2007 Survey.
Trends in transfer pricing issues and approaches Tax and efficient supply chain management
Enforcement actions are placing greater emphasis Most respondents consider the tax effects of business
on intercompany financing transactions and service change on a concurrent basis.
transactions.
• Reviews of intercompany financing transactions increased • A majority of respondents indicate that tax implications
dramatically from 7% in 2007 to 42% in 2010. were considered in the implementation of all categories of
business change.
• Parent respondents indicating that their service
transactions had undergone review increased from 55% • Cost reduction (78%) and information technology (IT)
in 2007 to 66% in 2010. system implementation/improvement (74%) were the
most common forms of business change undergone by
• Respondents view administrative and management respondents in the past four years.
service transactions and intercompany financing as
the transactions most susceptible to dispute with tax • Restructurings involving intellectual property were the most
authorities. common forms of restructurings.
• Moreover, the numbers of respondents holding such views
rose substantially. In 2010, 66% of parent respondents say
that administrative and management service transactions
are susceptible to dispute, up from 54% in 2007. As for
intercompany financing, the figure is 63% for 2010, up from
41% in 2007.
• Globally, taxpayers expect to devote more resources to
transfer pricing compliance — particularly in China, the
United States and India.
• Survey respondents continue to show a preference for
transactional methods in establishing transfer prices for
tangible goods, services and intercompany financing.
3 2010 Global Transfer Pricing Survey

7. Taxpayer approaches
Taxpayers are taking a more coordinated and globalized approach to transfer pricing documentation, although the
number of filers following a contemporaneous approach is slightly down.
• The number of parent respondents preparing their transfer pricing documentation on a concurrent, globally coordinated
basis rose to 41%, a significant increase relative to 2007.
• The percentage of parent respondents preparing transfer pricing documentation prior to audit remained stable at 79%.
• The percentage of parent respondents preparing their documentation contemporaneously with the filing of their tax
return decreased from 60% in 2007 to 54% in 2010. However, the figure was higher in the United States, Mexico, India
and Argentina, where contemporaneous documentation is a technical requirement.
• Preparation of contemporaneous transfer pricing documentation was lowest in Canada, France, Germany, Italy, Japan
and Korea. With the exception of Canada, these countries did not have contemporaneous documentation requirements in
place during the survey period.
• 69% of parent respondents indicate that upon audit, their transfer pricing documentation was viewed as adequate.
• The majority of parent respondents (58%) continue to use pan-regional comparables.
Key insights and recommendations
Previous editions of this survey have concluded that taxpayers should be adopting efficient
global documentation strategies; devising dispute resolution plans, both preventative and
remedial; and embedding tax considerations in business change. This edition re-emphasizes
those points, but with some subtle differences:
• ►Audit trends reveal the need for “glocal” documentation. MNEs should tailor their global
transfer pricing platform to local requirements in higher-risk, more complex countries.
• ►With audits up and material penalties significantly increased, avoiding disputes will be
tougher. MNEs should consider a more proactive approach to controversy management,
including appropriately targeted APAs.
• ►Service, intangibles and financing transactions are increasingly in the sights of tax
authorities. Our experience is that documentation of these categories of transactions
often lags behind documentation for tangible goods transactions. MNEs should develop or
enhance their documentation for these transactions.
• ►OECD developments are pushing profit-based methods to the forefront while MNEs
continue to rely on transactional methods to determine and document their intercompany
pricing policies. MNEs should consider profit-based methods as corroborating or primary
methods.
Addressing the challenges of globalization 4

8. Key trends in global taxation
and transfer pricing
The downturn in the global economy has Transfer pricing has also assumed greater public prominence in
the United States as a result of articles in the popular press and
raised the profile of transfer pricing. Tax
Congressional hearings on tax avoidance through “abusive”
authorities are both upgrading and increasing transfer pricing.
their staffing while at the same time placing
In the United Kingdom, Her Majesty’s Revenue and Customs
greater demands on corporations in areas (HMRC) has made a similar, coordinated transfer pricing push.
such as documentation. Meanwhile, the OECD In June 2008, HMRC issued its Guidelines for the Conduct of
is revising and updating key elements and Transfer Pricing Enquiries, which included the creation of a
specialized Transfer Pricing Group, a transfer pricing review
provisions of its transfer pricing guidance.
board and a risk-based approach to transfer pricing enquiries.
As a result, companies are finding they must In late 2010, HMRC also issued guidance to its field teams on
work harder to define and adopt a more more extensive use of penalties in transfer pricing cases.
proactive stance in defending their transfer The Chinese tax authority has also adopted a targeted
pricing policies and practices. approach, designating 30% of Chinese taxpayers as key
audit targets based on selected criteria. The criteria include
Tax authorities are targeting intercompany transactions in significant intercompany transactions, consecutive years
an attempt to protect and increase their tax bases. Since the without taxable income, reduced profit margins and low
2007 Survey, tax authorities in key jurisdictions have taken margins relative to industry peers. The audit initiative will rely
steps such as significantly increasing their transfer pricing on profit-based transfer pricing measures in preference to
staffing, adopting more centralized approaches to managing transactional approaches.
transfer pricing enquiries and establishing a more strategic, The increased focus on transfer pricing extends to smaller
risk-based approach to prioritizing transfer pricing reviews. markets, as well. The Australian Taxation Office is continuing
In the United States, the Internal Revenue Service (IRS) added to increase transfer pricing personnel and its current strategic
1,200 employees in 2009 to deal with international issues, transfer pricing compliance initiative is focusing on business
with another 800 added through the end of 2010. The IRS has restructuring, intra-group financing, mining services and
established a goal of achieving a staff of 120 transfer pricing changes in profitability.
economists, the highest number in its history. As part of its Along with increased transfer pricing staffing, tax
transfer pricing focus, in December 2009 the IRS announced a authorities have or will have at their disposal a number
number of important changes. These include: of new or proposed disclosure requirements. These
• The creation of a Transfer Pricing Practice. requirements will increase the transparency of taxpayers’
intercompany transactions and their transfer pricing
• The establishment of a Transfer Pricing Council to risks. In Latin America, many jurisdictions have mandated
coordinate transfer pricing reviews. transfer pricing disclosure forms, and others have regulations
• The establishment of a tiered approach to targeting that mandate the submission of transfer pricing reports
intercompany transactions based on their potential contemporaneously with the corporate tax return.
for abuse.
5 2010 Global Transfer Pricing Survey

9. In the United States, the IRS has also increased penalties for • A trend toward macro-level examinations, such as
failure to accurately file related-party disclosure forms (Forms evaluating the effect of business restructurings on the
5471 and 5472). It has also introduced Schedule UTP, which entire value chain or evaluating the aggregate return on
requires the disclosure of detailed information on uncertain investment under a cost-sharing arrangement
tax positions, including transfer pricing positions. At the same
• Blurring the lines between transaction types through the
time, the IRS is developing protocols to conduct joint audits
recognition of so-called “high-value” services
with its treaty partners.
Even as taxpayers cope with more intense and more
Tax authorities are armed with increasingly sophisticated
sophisticated scrutiny in developed markets, the geographic
and broad transfer pricing tools. Since the 2007 Survey,
scope of documentation requirements continues to expand.
the IRS has issued final transfer pricing regulations for
Since the 2007 Survey, China, France, Greece, Indonesia,
intercompany services and revised temporary regulations
Malaysia and Vietnam have all instituted new or significantly
for cost-sharing transactions. During the same period, the
enhanced transfer pricing requirements. Even jurisdictions
OECD issued revisions to Chapters I through III of the Transfer
traditionally viewed as tax-favorable, such as Hong Kong and
Pricing Guidelines along with a new chapter on business
Ireland, have introduced some level of requirement for transfer
restructurings. The Australian tax authorities issued similar
pricing documentation.
guidance on business restructurings in June 2010, and the
German administration is expected to soon finalize its July
2009 draft circular on this subject. These regulatory and The results of our 2010 Survey reflect both
legislative developments are characterized by a number of the intensity and the shifting focus of transfer
common features, including:
pricing enquiries. Taxpayers find themselves in
• Greater sophistication and flexibility in the selection of the challenging position of documenting and
transfer pricing methods, including the OECD’s move away defending their transfer pricing in more and
from a hierarchy of methods
more countries. The transaction types they
• The adoption of a “realistic alternatives” criterion into have to cover are increasing, and the emphasis
the selection of best method in the US transfer pricing is changing. Controversy is on the rise as
regulations and into the OECD guidelines
increasingly well-staffed tax authorities apply
• A tendency to extend the scope of a transfer pricing more sophisticated and sweeping transfer pricing
analysis beyond a single party to examine its effect on the
tools. At the same time, fortunately, a wider array
profit of the counterparty and/or the full value chain
of dispute resolution channels is available and
• The OECD’s prohibition of inappropriate shifting of risk being used.
(and profit), which includes the use of either intercompany
agreements or “low risk” transfer pricing methods, such as
cost-plus arrangements, that divorce risk from the entities
that control it
• Enhanced OECD comparability standards mandating more
effort and rigor in the selection of benchmarks
More countries, more issues,
More countries, more issues, more more tax authority aggression
tax authority aggression, and more and more disputes — that’s why
disputes – that’s why transfer pricing is
the number one international tax issue
transfer pricing is a leading
for respondents. international tax issue for
respondents.
Addressing the challenges of globalization 6

10. Insights from the survey
Transfer pricing still dominates
the tax agenda
Ernst & Young’s 2010 Survey continues to
demonstrate the high degree of importance 30% of tax directors in parent
tax departments assign to transfer pricing. firms worldwide identify transfer
More parent company respondents identified
transfer pricing as the most important tax
pricing as their most important
issue they face. tax issue.
Figure 1: Most important tax issues for tax directors (parents) This conclusion is supported by tax directors’ answers to
Transfer pricing another question. Asked how important they expect transfer
Tax minimization pricing to be over the next two years, 32% called it “absolutely
Cash taxes critical,” up from 29% in 2007. This suggests that the survey
Value-added taxes respondents are not complacent about their level of transfer
Double taxation pricing risk.
Tax controversy
Cash repatriation Figure 3: Importance of transfer pricing in the next two years
Foreign tax credits (parents)
Customs duties 2010 2007
0% 5% 10% 15% 20% 25% 30% 35% Absolutely critical 32% 29%
Thirty percent of tax directors in parent firms worldwide Very important 42% 45%
identify transfer pricing as their most important tax issue. In Fairly important 21% 18%
North America, transfer pricing was paramount for 21% of Not very important 4% 5%
respondents, but percentages were higher in other regions:
Not at all important 1% 1%
30% in Asia-Pacific (APAC) and 33% and in Europe, Middle East,
India and Africa (EMEIA). The percentages were highest in Figure 4 summarizes the importance respondents attach to
Italy (52%) and Denmark (60%). Figure 1 shows the eight other transfer pricing by industry. Tax authorities typically target
topics that registered among many respondents as the most industries with high-value, portable intellectual property
important tax issue. Tax minimization was the only issue that and those that generate high margins. It is not surprising,
rivaled transfer pricing. therefore, that more respondents in the pharmaceutical
Figure 2 summarizes the importance tax directors have industry rank transfer pricing as their most important tax issue
attached to transfer pricing over the last seven surveys. The than in any other industry. Because pharmaceutical companies
peak of concern was in 2005 when almost 60% described it as typically deploy valuable intangibles in more than one tax
“very important.” That percentage dropped in 2007 and 2010, jurisdiction, transfer pricing concerns typically loom large. The
but we attribute the declines to respondents’ sense that they pharmaceutical industry has also been exposed to some of the
have their transfer pricing issues under better control than most significant transfer pricing litigation of recent years.
they did in 2005. The technology and biotechnology industry, which is also
heavily reliant on intangible property, shows the second-
Figure 2: Importance of transfer pricing from 1997–2010 (parents)
highest level of importance. Respondents in industries that
60%
typically have lower levels of cross-border transfers, such as
50%
transportation, telecommunications and professional services,
40%
rank transfer pricing lower among their tax concerns.
30%
20%
10%
0%
2010 2007 2005 2003 2001 1999 1997
Very important Fairly important Not very important Not at all important
7 2010 Global Transfer Pricing Survey

11. The practice of transfer pricing is receiving
Respondents confirm ongoing greater attention
interest of tax authorities in a The increased importance MNEs attach to transfer pricing is
small number of concentrated driving increased deployment of both internal and external
transfer pricing resources and elevating the profile of transfer
industries. This will change in the pricing within the organization.
coming years. Thirty-one percent of parent respondents report some level
of increase in internal transfer pricing headcount, 62% report
an increase in the use of external consultants, and 23% report
There seems to be some legacy interest by tax authorities an increase in the use of software and other tools. Sixty-six
in lower-margin industries, such as the automotive and percent indicate that they had at least one full-time equivalent
transportation industries. There is also an inconsistency working on transfer pricing, up from 55% two years ago.
between increased tax authority scrutiny of financial
Forty-seven percent of parent respondents say that they have
transactions and the rather limited importance banks and
become more responsible to their boards of directors for
financial institutions place on transfer pricing. We expect this
transfer pricing matters and 41% say they have become more
perception to change in view of the increasingly sophisticated
responsible to their audit committees. As shown in Figure 5,
risk-assessment tools deployed by the tax authorities, which
ultimate responsibility for transfer pricing remains most often
will likely expose financial transactions to more frequent
with the tax department (39% of respondents), followed by
review. We also expect the focus on low-margin business to
the chief financial officer or parent company director. Only
erode. By contrast, we expect much more interest in businesses
8% of parent respondents delegate responsibility to the local
with footprints in emerging markets, such as mining, oil and
affiliate company.
gas and diversified industrial products.
Figure 5: Responsibility for transfer pricing within the organization
Figure 4: Percentage of respondents ranking transfer pricing as (parents)
their most important tax issue (parents and subsidiaries)
Pharmaceuticals
Technology and biotechnology 12%
Consumer products 3%
Retail and wholesale
Automotive 8% 39%
Diversified industrial products
Transportation
Power and utilities
Mining, oil and gas
Professional services
38%
Insurance
Media and entertainment
Chemicals
Banking and capital markets
Tax department Parent CFO/financial director Delegated responsibility
Telecommunications to local leader
0% 10% 20% 30% 40% 50% 60% 70% 80% Audit committee Other
Addressing the challenges of globalization 8

12. Companies are paying closer
attention to documentation
The heightened scrutiny of transfer pricing, Figure 7: Factors considered highly influential on transfer pricing
the widening range of jurisdictions with compliance (parents)
documentation requirements and the Tax audit activities
increased level of transfer pricing disclosure Tax department leading practices
all increase a taxpayer’s transfer pricing External auditor request
risk. That increased risk is reflected in the Audit committee request
enhanced importance survey respondents FIN 48 requirements or equivalent
attach to transfer pricing documentation. Economic crisis
Three-quarters of parent respondents in this Internal auditor request
year’s survey consider documentation more 0% 10% 20% 30% 40% 50% 60% 70%
important now than two years ago.
As they pay closer attention to documentation, more
companies are adopting a global approach.
Most parent respondents cite risk-based motivations for
preparing documentation. Thirty-six percent identified
risk mitigation as their primary motivation in preparing The number of parent respondents pursuing
documentation, while the number of respondents citing a globally coordinated transfer pricing
audit defense as their primary motivation has more than documentation strategy increased from 33%
doubled from 2007 to 20%. Fewer than 10% of respondents
in 2007 to 41% in 2010.
were motivated by either financial reporting requirements or
planning considerations.
Figure 6: Top priority in preparing transfer pricing documentation Despite the potential effect of the economic downturn on
(parents) resources, the number of respondents that do not prepare
transfer pricing documentation remains low at 3%.
Risk mitigation/
reduction Figure 8: Approach to transfer pricing documentation (parents)
Audit defense
Prepared concurrently, on a
globally coordinated basis
Consistency of
documentation
Prepared for a single country, and
Ability to identify tax modified to meet the needs of
planning opportunities other jurisdictions as necessary
Compliance with financial Prepared on an as-necessary,
reporting standards country-by-country basis with limited
coordination between countries
Judged case by case/
strategic or reactive decision
Did not prepare transfer
pricing documentation
Minimize compliance
costs
Adherence to historic Don’t know/not stated
practice/company policy
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Other
2010 2007
0% 5% 10% 15% 20% 25% 30% 35% 40%
Respondents generally take a regional, rather than a country-
2010 2007 specific, approach to comparables analysis. Fifty-eight percent
of parent respondents indicate that they use regional samples
Consistent with their broader risk-based approach, respondents to one degree or another, while only 38% use local comparables
cite tax audit activities as the most influential factor in for all countries (see Figure 9). Perhaps reflecting the difficulty
determining their transfer pricing compliance (see Figure 7). large MNEs face in assembling local comparable data for a large
This finding seems to suggest some degree of recognition by number of jurisdictions and transactions, the use of regional
respondents of increased tax audit activity. comparables was more prevalent among those respondents
with revenues of $10 billion or more than among smaller
companies. With increasing tax authority aggression, MNEs will
have to prepare local, as well as regional, comparables for their
transfer pricing documentation.
9 2010 Global Transfer Pricing Survey

13. Most respondents rely on regional comparables, As for the timing of their documentation, just over half (54%) of
parent respondents indicate that they prepare documentation
but tax authorities increasingly require
contemporaneously with the filing of their corporate income tax
local comparables. More “glocalization” of return. The level of contemporaneous compliance is generally
benchmarking and comparables studies will be highest in those jurisdictions with specific contemporaneous
needed to mitigate audit risk. documentation requirements, namely Argentina (100%),
Mexico (86%), India (78%) and the United States (75%). The
level is generally the lowest in those jurisdictions that did not
Figure 9: Approach to comparables sets (parents) have contemporaneous documentation requirements at the
time of this survey, including Italy (29%), France (25%) and
Germany (14%).
4%
The results for Canada, which has formal documentation
27% requirements, were anomalous, with only 22% of parent
respondents indicating that they prepare their transfer
pricing documentation contemporaneously with the filing
38%
of the tax return. Figure 11 summarizes contemporaneous
documentation practices by jurisdiction.
31% Figure 11: Contemporaneous documentation by parent company
jurisdiction (parents)
New Zealand
Local comparables Pan-regional sets, but Pan-regional Unknown Argentina
searches for all with exceptions for comparables sets
countries specific jurisdictional across multiple Mexico
requirements jurisdictions India
US
Respondents’ reliance on regional comparables is somewhat
South Africa
surprising given the broadening range of local documentation Netherlands
requirements. The disconnect between regulatory trends and Brazil
taxpayer practice is reflected in respondents’ audit experiences. UK
Parent respondents cite insufficient local focus on comparables as Spain
the most frequent basis on which their documentation was judged Ireland
inadequate upon audit (see Figure 10). Furthermore, nearly a Australia
Belgium
third of respondents indicate that they were required to perform
Denmark
additional comparables analysis to identify local comparables. No
Sweden
doubt the hot topic of debate in transfer pricing compliance over
Switzerland
the next decade will be how to reconcile the need for consistency Norway
and simplicity with diverging and increasingly detailed Finland
documentation requirements by tax authorities. Italy
Japan
Figure 10: Basis on which documentation found inadequate upon France
audit (parents) Canada
Germany
Insufficient local
focus — comparables Korea
Reason not given/arbitrary 0% 20% 40% 60% 80% 100%
Incorrect method
Insufficient demonstration of
business case for transactions
Insufficient local focus —
functional analysis
No documentation prepared
Key facts omitted
Not contemporaneous
Economic analysis not accepted
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Addressing the challenges of globalization 10

14. The risk of audit is rising ...
More survey respondents report that Figure 13: Jurisdiction in which transfer pricing policy was examined
they have been subjected to a transfer in the past four years (among parent companies that had undergone
a review since 2006)
pricing review. Sixty-eight percent of
2010 2007
parent respondents indicate their transfer US 36% 31%
pricing policy had been examined by tax Germany 32% 31%
France 21% 27%
authorities, up from 52% in the 2007 Survey UK 19% 27%
(see Figure 12). Canada 18% 23%
Italy 13% 15%
Figure 12: Incidence of transfer pricing review (parents) China 12% 4%
Australia 11% 11%
80%
India 11% 6%
70% Japan 9% 12%
60%
50%
Increasing numbers of respondents are experiencing
40% the pains of transfer pricing audits globally. However,
30% the range of countries in which audits occur is shifting,
20%
with mature transfer pricing jurisdictions apparently
scaling back and emerging jurisdictions scaling up
10%
dramatically. The increasing pressure on governments
0% to raise revenues and the dedication of additional
2010 2007
transfer pricing enforcement resources are likely to lead
Respondents’ risk of audit varied depending upon their to reinvigorated scrutiny in all markets.
intercompany transactions and their size. The establishment
of limited risk distribution structures, material intercompany
license transactions and company size are all positively The survey results indicate a substantial increase since 2005
correlated with the risk of transfer pricing review. These in the percentage of adjustments resulting in penalties, as
findings are consistent with the application by tax authorities summarized in Figure 14.
of a risk-based approach to transfer pricing reviews. The
larger the company, the larger the transfer pricing adjustment Figure 14: Percentage of adjustments resulting in penalties (parents)
it typically yields. Intercompany licensing transactions and 20%
limited-risk distribution arrangements, which frequently
involve the conversion of a full-fledged distributor with existing 15%
marketing intangibles, are typically susceptible to larger
adjustments than tangible goods transactions or even service 10%
transactions.
While the level of transfer pricing reviews has increased 5%
globally, the jurisdictions where those reviews have occurred
have shifted since 2007. The United States and other mature 0%
transfer pricing jurisdictions head the list of jurisdictions 2010 2007 2005
where respondents had experienced a review, but China and According to the survey results, there is now a 1 in 5 chance of
India have shown a significant increase in audit activity. The suffering a material penalty compared with a one in 25 chance
countries showing a reduction in activity are generally those in 2005. The increasing imposition of penalties is a function of
that face resource constraints, focus on a smaller number of increasing tax authority resources, as well as tax authorities’
high-profile cases or are revising their risk-based approach obvious need to raise more revenues. We expect the trend
to case selection. Figure 13 summarizes the geographic toward increased penalties to continue.
distribution of the reviews experienced by respondents.
Taxpayers are responding to increased audit activity with an
increased reliance on risk assessments.
Sixty-seven percent of parent respondents indicate they
have conducted a risk assessment in the past three
years, an increase from 53% in the 2007 Survey.
11 2010 Global Transfer Pricing Survey

15. … as the controversy
management tool chest
is growing
A taxpayer’s options for resolving transfer Seventy-nine percent of parents report that they are generally
satisfied with the APA process. However, many remain
pricing disputes after domestic appeals
unconvinced (or unaware) of the benefits of APAs: fewer than
were historically limited to three: APAs, half (47%) of parent respondents not already using APAs say
competent authority relief (through the they would consider using them in the future.
Mutual Agreement Procedure provision of the The 2010 Survey results show slightly increased reliance
relevant treaty) and litigation. Since the 2007 on the competent authority process, reversing a moderate
Survey, binding arbitration has arisen as an trend from 2003 through 2007 of decreased reliance. While
the trend from 2003 to 2007 may have resulted from the
additional mechanism.
increased availability of APAs and a general desire by taxpayers
Published statistics from many tax authorities indicate record to manage controversy risk prospectively, the 2010 results
levels of APA applications overall. For example, the IRS is at a may reflect a global trend toward increased bilateral and
four-year high while the Canada Revenue Agency is at an all- multilateral transfer pricing dispute resolution. Figure 16
time high. summarizes the pattern over time.
The reported use of APAs in our transfer pricing surveys has Figure 16: Respondents referring a matter to competent
nearly doubled since the inception of APA programs around the authority in the previous four years
time of our 1999 Survey. The growth in APA use is a function 2010 2007 2005 2003
of the increasing availability of APA programs and increasing Parents 18% 17% 18% 18%
realization of the value of APAs as dispute resolution tools. We Subsidiaries 17% 11% 13% 16%
predict that the use of APAs to resolve disputes and to reduce
FIN 48 reserves will continue to trend upward. MNEs should The newly available binding arbitration process has yet to be
consider the strategic use of APAs in both of these areas. used by a significant number of respondents, with only 14
parent respondents (2%) indicating they have pursued this
Although only 23% of parent respondents indicate using option in a transfer pricing controversy.
APAs as a controversy management tool, the level of Litigation of transfer pricing disputes remains infrequent, with
satisfaction with the APA process among users is high. only 11% of parent respondents overall pursuing this avenue.
Ninety percent indicate that they would seek an APA in The only jurisdiction with significant litigation activity is India,
the future. where 50% of respondents have relied on litigation for the
resolution of transfer pricing disputes.
The range of jurisdictions in which parent respondents have As summarized in Figure 17, competent authority is the
sought APAs is wide (29 countries). But the principal APA preferred method among parent respondents for resolving
jurisdictions remain those with well-developed transfer pricing transfer pricing disputes.
regimes, such as the United States, the United Kingdom, the
Netherlands, Australia and Japan (see Figure 15). Figure 17: Preferred methods of resolving transfer pricing disputes
(parents)
Figure 15: Top five jurisdictions in which an APA has been used
40%
(parents)
45% 35%
2010 2007 2005 2003 2001 30%
40%
25%
35%
20%
30%
15%
25% 10%
20% 5%
0%
15% Competent authority APA Litigation Binding arbitration
10%
5%
0%
US UK Netherlands Australia Japan
Addressing the challenges of globalization 12

16. Transfer pricing rules are in flux
Regulations and resulting practice are in
Despite the increased importance of profit-based
flux all over the world. For example, during
methods in the OECD and in many countries in
the last three years, both the OECD and the
transfer pricing audits, we still observe a minority
US Treasury issued significant new transfer
of respondents using profit-based methods.
pricing regulations or guidelines. Similarly, a We predict that regulatory shifts will result in
wide range of countries — from Germany and a dramatic increase in the use of profit-based
Italy to Russia and China — have delivered or methods as corroborative, or sometimes primary,
are at least in the process of implementing transfer pricing methods. We have already begun
significant revisions to their rules and to see this trend in high-profile controversy
practices. cases. Survey readers should begin to consider
the importance of profit-based methods in their
In the United States, the 2008 temporary cost-sharing transfer pricing planning and documentation.
regulations and the 2009 final service regulations reflect
the increased importance the IRS attaches to service and
intangible transactions. These regulations also introduce a new Figure 18: Transfer pricing methods used in establishing tangible
level of sophistication, as evidenced by their sheer length in goods pricing (parents)
comparison to the original regulations they superseded. Cost plus 30%
Benchmark of third-party prices (CUP method) 27%
The OECD’s revisions to Chapters I through III of the Transfer
Pricing Guidelines signal a shift from the OECD’s historically Profit-based method (CPM/TNMM) 23%
strong preference for transactional methods toward accepting RPM (resale price method)/resale minus 12%
profit-based methods. The OECD’s Restructuring Chapter Profit split 3%
signals a new scrutiny of business restructuring transactions.
Other 6%
Our survey responses reflect broad awareness of such
developments. Sixty-two percent of parent respondents Figure 19: Transfer pricing methods used in establishing service
headquartered in OECD countries indicate awareness of the transaction pricing (parents)
OECD discussion draft, Transfer Pricing Aspects of Business Cost plus 52%
Restructuring. Awareness of the US cost-sharing regulations Benchmark of third-party prices (CUP method) 21%
was high among US parent respondents at 66%. However,
TNMM 11%
the figure is a mere 28% among parent respondents with
At cost 7%
headquarters in other jurisdictions. Fifty-three percent of
parent respondents indicate that they were altering their Value-based service fees 2%
transfer pricing policies in response to regulatory changes. Other 6%
Based on our survey, taxpayers are not yet moving toward
Figure 20: Transfer pricing methods used in establishing intangible
profit-based methods — even though such methods are
goods licensing (parents)
increasingly preferred by tax authorities. Parent respondents
Third-party benchmark agreement between the 22%
instead continue to show a strong preference for transactional
company and an unrelated party
methods in establishing pricing for tangible goods, services and
Third-party benchmark agreement between two parties 21%
intangible goods (see Figures 18 through 20).
unrelated to the company
Profit-based method (CPM/TNMM) 21%
Profit split 9%
Other 25%
Don’t know/not stated 3%
13 2010 Global Transfer Pricing Survey

17. While MNEs may not be consistent with current regulatory Figure 22: Most significant transfer pricing examination (parents)
trends in their choice of transfer pricing methods, their
prioritization of transactions susceptible to review is Services
aligned with the audit priorities established by the major tax Transfer of sales of
authorities. Parent respondents ranked services, financing tangible goods
Intercompany
and intangible transactions as among the most susceptible to financing
transfer pricing review (see Figure 21). License of intangible property
Cost sharing/
cost contribution agreements
Parent respondents ranked services, financing Other/don’t know
and intangible transactions as among the most Imputed or increased
compensation/indemnification
susceptible to transfer pricing review, and all payments for business change
0% 10% 20% 30% 40% 50% 60% 70%
categories of transactions as more susceptible to
review than in 2007. 2010 2007
Parent respondents also report more intrusive transfer pricing
examinations with requests for all categories of documents
Figure 21: Transactions most susceptible to review by tax authorities and sources above their 2007 levels. In line with the
(parents) increased scrutiny of the commercial basis for intercompany
pricing policies, tax authority requests for access to company
Administrative or managerial services
operational personnel increased significantly from 36% in
Intercompany financing 2007 to 49% in the current survey. As tax authorities have
Technical services expanded their analyses beyond a single party to examine
License of intangible property effects on the profit of the counterparty, requests for foreign
Cost sharing/cost contribution agreements affiliate financial records and management accounts have
Transfer or sales of finished goods for resale
increased. Intercompany agreements (not covered in the
2007 Survey) stood out as an almost universal request in
Commission for sales/transfer of goods
Sales of raw materials or components transfer pricing audits.
between group companies
Imputed or increased compensation/
indemnification payments for business change Figure 23: Requests made in transfer pricing audit (parents)
Treatment of stock-based compensation
Financial records of
None foreign affiliates
Other Access to company
operational personnel
Don’t know/not stated Access to the company’s EDP
system/other computer records
0% 10% 20% 30% 40% 50% 60% 70%
Internal documents relating to
tax input on business change
2010 2007
Correspondence
with tax advisors
Tax authority examinations reflect the same Other company documents not specifically
increased focus on service and intangible transactions, prepared for transfer pricing purposes
Disclosure and specification of uncertain
with intercompany loans also showing a striking increase in tax positions in statutory accounts
scrutiny. As shown in Figure 22, 42% of respondents that None of these
underwent a transfer pricing examination report that their
0% 10% 20% 30% 40% 50% 60%
intercompany financing was examined, up from only 7% in the
2007 Survey. Sixty-six percent report that their intercompany 2010 2007
service transactions were examined, up from 55% in the
2007 Survey.
Addressing the challenges of globalization 14

18. Restructuring efforts and the pursuit
of a more tax-efficient supply chain are
becoming more complex
At precisely the time when companies need Figure 24: Categories of business change implemented since
to achieve greater efficiency in all areas 2006 (parents)
Total EMEIA Americas APAC
— business and tax alike — a number of
Cost reduction 78% 81% 85% 57%
transfer pricing developments are presenting
IT system 74% 74% 83% 60%
challenges to MNEs who are restructuring implementation/
their businesses. The IRS, for example, improvement
released a Coordinated Issue Paper on buy- Entry into new 71% 75% 76% 51%
markets/new product
ins related to cost-sharing arrangements and lines
revised cost-sharing regulations. Similarly, Post-merger 63% 67% 66% 46%
the OECD has issued its Chapter IX focusing integration/acquisitions
on business restructurings. At the same time, Supply chain 50% 53% 49% 39%
optimization
the tax effects of business restructurings are
Centralization 50% 55% 50% 30%
receiving increased scrutiny from the press of business or
and the US Congress. management functions
Outsourcing or off- 26% 26% 35% 14%
shoring of supply chain
Our 2010 Survey queried respondents in detail on their functions
business change and restructuring activities. These questions
covered the nature of their business restructurings, the
consideration of tax implications in business restructurings and Cost reduction and IT system implementation or improvement
the timing of restructuring activity. projects were the most common categories of business change.
The focus on cost reduction is unsurprising in the context of
Figure 24 presents the types of business changes undertaken the current economic downturn. However, the prevalence of IT
by parent respondents since 2006 in total and by region. projects, which are typically costly, is somewhat unexpected.
Outsourcing or off-shoring of supply chain functions were
the least prevalent business change projects among survey
respondents.
Approximately half of all parent respondents have embarked
on either supply chain optimization or centralization of
business or management functions since 2006. The prevalence
of these structures varies significantly by industry. In the
chemical industry, for example, where products tend to be
bulky and supply chains difficult to reengineer, 49% of parent
respondents undertook supply chain optimization projects in
the last four years. Respondents from the pharmaceuticals and
telecommunications industries, on the other hand, indicate
considerably higher levels of supply chain optimization.
With the increasing relative growth opportunities
provided by emerging markets, companies are
shifting focus to India, China and Brazil. Such shifts
provide opportunities and motivation for supply
chain reengineering.
15 2010 Global Transfer Pricing Survey

19. Geographically, there are significant differences in business In spite of greater complexity and added documentation
restructuring activity, with the Americas and EMEIA showing requirements, companies are still pursuing a wide array
higher levels of all categories of business change than the of business restructuring, streamlining and supply chain
APAC region. The rapidly changing global business footprint reconfiguration due to business necessity. Figure 26
and its eastward shift suggest that the APAC region will require summarizes the business restructurings that parent
intense focus by tax departments in the coming years, as MNEs respondents have implemented, both in total and by region.
play catch-up to accomplish in the APAC region what they
already have in EMEIA and the Americas. Figure 26: Business restructurings implemented or being pursued
(parents)
Figure 25: Centralization of management and supply chain Total EMEIA Americas APAC
optimization by industry (parents)
Centralized intangible 42% 47% 40% 30%
property ownership
Telecommunication
and management
Pharmaceuticals Cost-sharing/buy-in 39% 46% 35% 24%
agreements
Retail and wholesale
Intangible property 36% 37% 40% 26%
Media and entertainment planning
Transportation Shared service centers 35% 35% 47% 15%
in low-cost jurisdiction
Banking and capital markets
Contract R&D 34% 36% 35% 25%
Insurance Centralized or regional 34% 36% 38% 20%
procurement company
Automotive
Limited-risk 30% 33% 34% 12%
Consumer products distributor(s)
Mining, oil and gas Global or regional 28% 27% 33% 25%
principal or central
Technology and biotechnology entrepreneur
Diversified industrial products Limited-risk service 27% 30% 31% 15%
providers
Chemicals
Single regional sales/ 27% 28% 29% 21%
Professional services marketing entity
Limited-risk 23% 25% 28% 9%
Power and utilities
manufacturing
0% 10% 20% 30% 40% 50% 60% 70% 80%
Centralization of business or Supply chain
management functions optimization
The survey reveals that a significant portion of
There is little regional variation in the relative ranking of
business change projects. However, there are marked, if not business restructurings involve intangibles. Given
surprising, variations in the absolute levels of business change governments’ focus on intangibles — both incentives
implementation. The EMEIA and Americas regions return to retain or attract to their jurisdictions (e.g., the
very similar levels of activity, while APAC respondents, where recent UK announcements on the patent box) and
companies tend to be less mature, indicate significantly lower enforcement efforts — we can expect continued
levels of business change.
examination, controversy and litigation activity in
this area.
Addressing the challenges of globalization 16

20. Given the significant role intangibles play in today’s businesses, Figure 28 summarizes the timing of parent respondents’
restructurings focused on intangibles, including contract business restructuring activities.
R&D, are particularly prevalent. Less popular are centralized
Figure 28: Timing of business restructuring activities (parents)
procurement and global or regional principal structures.
Limited-risk manufacturing structures are the least common 2005– 2001– Prior to Don’t
forms of restructuring. This is not surprising because many 2010 2004 2000 know
companies have already established manufacturing in low-cost, Centralized intangible 37% 18% 36% 9%
tax-competitive jurisdictions, employ “manufacturing-lite” property ownership
and management
business models or are not involved in manufacturing activities
at all. Centralized or regional 59% 13% 24% 5%
procurement company
Again, the survey shows that respondents are generally aware Contract R&D 53% 16% 25% 6%
of the need to consider tax implications in the planning and
Cost-sharing/buy-in 52% 21% 22% 5%
implementation of business restructuring projects. Figure 27 agreements
summarizes the consideration of tax implications in the various
Global or regional 44% 24% 25% 7%
categories of business change.
principal or central
entrepreneur
Figure 27: Consideration of tax implications in business change
(parents) Intangible property 51% 15% 25% 9%
planning
Yes No Don’t
know/ Limited-risk service 52% 20% 22% 7%
not stated providers
Post-merger integration 91% 7% 1% Limited-risk 43% 27% 27% 3%
distribution
Outsourcing or off-shoring of 81% 17% 2%
supply chain functions Limited-risk 43% 24% 28% 5%
manufacturing
Entry into new market/new 79% 19% 2%
product lines Shared service centers 66% 22% 9% 3%
in low-cost jurisdiction
Centralization of business or 77% 22% 1%
management functions Single regional sales/ 47% 21% 26% 6%
marketing entity
Supply chain optimization 75% 23% 2%
IT systems implementation/ 66% 32% 2% The 2005–2010 period saw an upsurge in restructuring
improvement activity after a lull in the 2001–2004 period. Centralization
Cost reduction 62% 37% 1% of intangible property management, in particular, rebounded
Other forms of business change 62% 23% 15% during the 2005–2010 period with a 36 percentage point
increase. Other forms of planning related to intangible
Awareness of the need to consider tax implications is foremost property, such as contract R&D, also increased in the 2005–
in post-merger integration (91%) and outsourcing/off-shoring 2010 period. Regional procurement companies, which were
(81%) projects. among the least popular forms of planning before 2005, have
moved into first place among planning structures.
17 2010 Global Transfer Pricing Survey

21. Conclusion
In the many years that Ernst & Young has The recession and regulatory uncertainty seem to have
stemmed the amount of business-driven tax planning in the
been tracking transfer pricing trends, a
last few years. We see great challenges for MNEs in dealing
number of core themes have emerged. with the transfer pricing implications of business change. Given
However, this year’s survey uncovered some the significant increase in regulations over the past few years,
subtle differences and new areas for MNEs more complex transfer pricing designs are warranted to meet
the new high standards set by the OECD and regulators in
to consider.
countries like Germany.
MNEs must take a more proactive approach to transfer pricing. Taxpayers should reinforce their transfer pricing
The risk of challenge by the authorities continues to increase. documentation for intercompany services, licensing and
In their quest for more revenue, tax authorities have become financing transactions. This year’s survey highlights the
better at auditing, with higher hit rates for adjustments and increasing scrutiny these transactions are receiving from tax
higher levels of penalties. Documentation needs to cover more authorities. Unlike tangible goods transactions, where cost
countries — witness China — and more types of transactions, of production or acquisition can serve as a reference point
as evidenced by the dramatically increased scrutiny of for value, the valuation of services, licensing and financing
loans and financial transactions. Despite the need to cover transactions is more complex, being primarily related to value
more countries, globally consistent documentation will need rather than costs. As a result, tax authorities recognize that
to accommodate the increasing trend toward “glocalization.” these transactions have the potential to generate significant
Two of the most commonly cited reasons for suffering audit adjustments. At the same time, it is our experience that
adjustments were insufficient local tailoring of facts and transfer pricing documentation for services and intercompany
insufficient local benchmarking of prices or margins. Risk- financing transactions often lags behind documentation of
based assessments will need to find a balance between global tangible goods transactions. Taxpayers should ensure that their
strategy and local detail, a change we are seeing first-hand with services, intangibles and financing policies and documentation
some of our largest, most sophisticated transfer pricing clients. can withstand the rigors of the current transfer pricing
environment.
MNEs should pursue a more proactive and extensive use of
APAs where there is reliable availability. MNEs will see more Ernst & Young’s Global Transfer Pricing group expects the
instances of potential double taxation. Instead of waiting to next few years to be dynamic and exciting as MNEs exercise
react to controversy, MNEs will need to plan for it by learning greater rigor to meet increasingly onerous requirements. In
how to handle domestic appeals, competent authority the end, we anticipate more movement across the gamut of
proceedings, alternative dispute resolution mechanisms and transfer pricing areas — preparing documentation to meet
APAs. Although more than a third of respondents prefer compliance requirements and mitigate penalties; managing
the Mutual Agreement Procedure for dispute resolution, we audits, resolving disputes and eliminating double taxation; and
anticipate more litigation where it is not an option. harnessing business change in a tax-efficient manner. We look
forward to sharing the journey with readers of this survey!
Addressing the challenges of globalization 18

22. 19 2010 Global Transfer Pricing Survey

23. Country-specific findings
from the survey
The preceding pages outline the key global findings and include a series of
comparable tables focusing on key questions posed in the 2010 Survey. Readers
are able to use the following tables to compare the findings for individual countries
with the global and respective regional findings.
Argentina Australia Belgium Brazil Canada
China Denmark Finland France Germany
India Ireland Italy Japan Mexico
Netherlands New Zealand Norway South Africa South Korea
Spain Sweden Switzerland United Kingdom United States
Addressing the challenges of globalization 20

24. Americas
21 2010 Global Transfer Pricing Survey