Recovery continues to be slower than most businesses would prefer. Part of the slow growth is due to concern from many business owners regarding whether they can trust some of the leading economic indicators released in the past few months.

On a positive note, recent trends have shown that unemployment is being reduced overall. The National Association of Manufacturers also reported that more than 31,000 new U.S. manufacturing jobs were created in February. This increase, however, is tempered with the belief that many unemployed individuals have simply given up on job searches, as they have now been out of work for an extended period. The end of their search effort causes many to fall off of the tracked statistics. This may be causing some lower-than-actual unemployment numbers to be reported. In addition, a recent University of Michigan study showed consumer confidence figures have fallen slightly due to weakening perceptions about the economic environment.

Two other areas facing business owners have caused them to move at a slower pace when considering expansion, acquisitions and hiring of additional employees. These two areas are taxes and the looming health care changes. With the potential for higher taxes and higher health care costs on the horizon, many entrepreneurs are taking a wait-and-see approach. Thus, the reports of companies continuing to pay down third-party debt and stockpile cash still exist.

It seems businesses have returned to profitability as a result of their concentrated efforts implemented to endure the economic downturn. The threat of losses, liquidity issues and, in some cases, covenant violations forced many businesses to lean up operations, challenge spending and do more with less. As a result, many are producing more with fewer resources and have improved their processes. Earnings levels have improved, but most results are still below the levels experienced in the mid-2000s.

Also of concern is uncertainty in foreign markets. While we have had a credit and debt crisis here, overseas trouble has many business owners contemplating international business relationships and opportunities. In the mid-2000s, many production jobs were moved overseas to benefit from inexpensive labor. With the current domestic economic conditions and the lack of stability driven by the uncertainties in the Eurozone, there are rumblings that U.S. companies may work to grow domestic manufacturing and pull jobs back to the U.S. Innovations also are occurring in certain niche areas, and the shrinking cost advantage of outsourcing production is becoming more evident. Job growth continues to be a major focus domestically, and labor negotiations of major industries, such as auto makers, have demonstrated the desire for large companies to guarantee sustainability and promise to keep jobs in the U.S.

There is also concern regarding the stability of the buying power of foreign markets. U.S. companies have continued to expand their penetration into foreign developing markets. The ultimate results of the various national debt issues in the Eurozone could create an economic ripple effect that could affect demand for U.S. products in many foreign markets. Also, the continued political changes and instability in eastern countries can create swings in energy prices and product demand in those markets. This creates difficulty in planning for growth and expansion — and correspondingly a fair amount of caution when it comes to the timing of capital investment and business expansion.

Merger & Acquisition Activity

While the aforementioned factors have slowed down private business owner activity related to expansion and acquisitions, another business segment seems to have picked up. Private equity groups and private investors have been much more active in recent months. There has been significant public discussion in the past 18 months regarding cash that is on the “sidelines” waiting to be invested. We have seen that as the economy begins to expand and smooth out, more M&A deals are being contemplated. Also, business valuations are returning to more normal and expected levels driven by those wishing to market their businesses, and banks are becoming more willing and involved in financing such deals. We view this as an encouraging sign and an indication of continued movement in the right direction.

Business Succession

Each business faces unique challenges, but all ultimately need to consider, plan for and execute a succession plan. Whether the plan involves selling the company to an unrelated third party, transitioning or selling the company to the next generation, an ESOP or some combination of these, this issue has to be addressed. The recent increase in merger and acquisition activity has been driven in a number of cases by exit strategies employed by many business owners. As the baby boomers continue to exit the workforce and leave their businesses, we will see more and more movement and opportunity in this M&A wave. When these decisions are made and the process starts, planning can have a significant effect on the company’s valuation and the ultimate profit realized by the owner. This truly is one of those areas where “an ounce of prevention (of negative results) is worth a pound of cure.”

Here are a few planning ideas that can be game changers when an owner is looking to improve value:

  • Perform due diligence on your business and your business processes and activities. Many sellers believe the diligence process is the buyer’s responsibility. While buyers will spend a great deal of time and effort on due diligence, performing self due diligence can overcome a number of surprises, allow the seller time to position its operations and activities to provide the greatest advantage and better prepare the seller for questions asked during the process. Being prepared when soliciting bidders also will likely increase the number of bidders you may be able to attract.During this process, you should consider reverse due diligence, or preparing the data that will likely be requested during the due diligence process. These are standard documents requested in most diligence engagements. Having this information ready on the front end adds value and helps move the process along. Delays in outside or third-party diligence have been proven to affect deal values.Also, have your company’s financial statements audited by a firm that potential buyers consider reputable. Audited financial statements provide immediate credibility.

  • Make sure you impress upon buyers the value of the company you are offering to them. Build a business case for why the company will continue to prosper and grow and what positive effects the existing infrastructure will have on such growth.

  • Document agreements with employees and third parties. It is important for buyers to mitigate the unknowns when buying a business, so the more documentation for contractual arrangements, the better.

  • Be proactive relative to unresolved or potential litigation. Review pending or threatened claims with your attorneys and be honest about what situations exist. Resolve issues as diligently as possible. Make sure to include all potential human resources issues that may exist.

  • Avoid accounting discrepancies, unusual transactions and changes in reporting methods. An audit, as discussed above, can assist with this. However, remember that any such instances will need to be explained and will be challenged by a buyer. Clouding facts will lead to more questions and may ultimately impact the value of your deal.

When it comes to the value of your company, you can never be too diligent. For more ideas on how to enhance value, contact a BKD advisor.

Scott L. Fields is a partner at the Houston office of BKD, LLP. Reach him at

Article reprinted with permission from BKD, LLP,  All rights reserved.

Published in Houston
Tuesday, 03 April 2012 14:51

Unmatched client service at BKD Dallas

Led by Managing Partner Tom W. Watson, CPA, FHFMA, BKD Dallas was established in June 2009 when Dallas-based KBA Group LLP joined BKD. The office consists of 95 team members, including eight partners, who offer focused experience in audit, tax, risk management and transaction advisory services for public and private companies in a variety of industries.

BKD Dallas is located in the nation’s ninth largest city and is surrounded by many sites and recreational opportunities, including Six Flags over Texas, SpeedZone — a racing track that includes four kinds of racing, mini golf and other activities — the Dallas Zoo, Dinosaur Valley Park where visitors can hand feed roaming animals and Nasher Sculpture Center that features modern art, in addition to a host of shopping and dining options.

Smart Business spoke with Watson about BKD Dallas and how the organization innovates and impacts its community.

Give us an example of a business challenge your organization faced, as well as how you overcame it.

The Dallas office has a deep history of working with private equity funds and their related portfolio companies. When the economic crisis in 2008 started, many of the funds we worked with stopped doing deals, causing a potential slowdown in our business. We recognized the need to diversify our Dallas practice office to cover more industries. A benefit of being with BKD is lots of experts around the firm in lots of industries. Government/non-profit and health care were two of the areas we knew BKD was deep in but that had not been developed in Dallas. We were able to identify two top BKD partners in each of these niches who had a desire to come to Dallas and build these practice areas. We’ve had great success in these areas, adding multiple governmental and health care clients over the last two years. As a result, we’ve been able grow our business despite the economy and create rewarding career options for our employees.

In what ways are you an innovating leader, and how does your organization employ innovation to be on the leading edge?

There are a number of CPA firms that are technically competent to provide audit, tax or advisory services to companies. We believe that the innovative firm is the one that provides highly technical solutions with unmatched client services. We wrote a book about our client service, which we share with every employee and many of our prospective clients. It’s a big step to put a very high set of client service standards in writing and then tell our clients to judge us on those. By following through, we believe we really differentiate ourselves from other firms, resulting in long-term satisfied clients. Even though our book was written a few years ago, it continues to be time-tested and useful in virtually every business setting.

What is the greatest lesson you’ve learned, and how have you applied it?

It’s funny how the lessons you learn early in life seem to have applicability throughout your professional career. Telling the truth is one of these, and it’s as valid in a business environment as when you are in grade school.

When working with clients, integrity and honesty are paramount. It includes being honest and upfront about meeting deadlines and not setting expectations that cannot be met. It also means addressing issues quickly, whether its good or bad news. Clients expect us to be upfront with them, and as part of our client service standards we practice that every day.

How does your organization make a significant impact on the community and regional economy?

Being part of the community is important for both BKD’s partners and employees. We are active members of the North Dallas Chamber of Commerce, and we regularly support their initiatives to improve the business environment in the north Texas area. We have a number of our partners and staff involved in charitable organizations and community events. We encourage our staff to participate in coordinated charitable activities, such as supporting the North Texas Food Bank.

Through our charitable arm, the BKD Foundation, we’ve initial corporate sponsor of the First Tee of Dallas. This is a great organization that impacts the lives of young people by providing educational programs that build character, instill life enhancing values and promotes healthy choices through the game of golf. We also support numerous other charity activities, including Go Red for Women. The foundation’s main goal is to support causes in the communities in which we work, and we’ve tried to do that.

How have you added “value” to the products and services you provide to customers and clients?

One of our client service standards is true expertise. One way we promote this is having our staff become true experts in a particular industry early in their career. The fact that we have partners, managers and in-charges on nearly every project who have significant industry focus — whether it be energy, banking, health care, manufacturing, government or real estate — brings value to the product.

We also operate under the idea of principled innovation — we bring innovative solutions to clients with a principled base. We do not let innovation lead us into new, untested, unproved or unprincipled solutions; we try to retain true professionalism in the solutions we offer.

What is your philosophy on going “above and beyond” for customer service?

Client service is at the heart of everything we do. We have a service contract with our clients that says we will offer the five core tenets of our philosophy:  integrity first, true expertise, professional demeanor, responsive reliability and principled innovation. While it seems on the surface to be a pretty simple concept, in practice it isn’t executed by very many people as well as it should be. We live those concepts every day, and it shows in our client service.

Tom W. Watson, CPA, FHFMA, is the managing partner of BKD Dallas. Reach him at (972) 702-8262 or

Published in Dallas



Transfer pricing refers to the pricing of goods, services or intangibles within a multinational organization, particularly in regard to cross-border transactions.

The vast majority of global trade occurs between related-party entities. As global trade increases, companies are confronted more and more with complex issues associated with intercompany pricing. This is compounded because many countries have specific transfer pricing legislation, and the tax authorities within those countries aggressively pursue transfer pricing adjustments. It is no wonder transfer pricing is often listed as the single most important international tax issue facing multinational companies.

Smart Business sat down with Will James and David Whitmer of BKD, LLP, to discuss transfer pricing and the following is their country-by-country breakdown.

Australia: Transfer Pricing Rule Changes Proposed

The Australian government has announced intent to reform its transfer pricing regime due to worries its regulations, issued in 1982, are outdated, leading to an eroding tax base and a less attractive business climate for investors. As part of the process, the Australian government issued a Consultation Paper on November 1, 2011, outlining potential changes in attempt to solicit comments. Comments on the Consultation Paper closed on November 30, 2011. The main point of the Consultation Paper was an attempt to modify Division 13 (Australia’s transfer pricing legislation) to better reflect the arm’s-length principle and line up more closely with the 2010 revised Organisation for Economic Cooperation and Development’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).

The Consultation Paper suggests taxpayers are obliged to conduct intercompany business in an arm’s-length manner and maintain contemporaneous documentation; the paper also considers a statute of limitation for tax audits and adjustment periods. The Consultation Paper seeks to move away from looking at specific transfer prices, instead focusing on transaction outcomes. The Australian government also considered that there is some disconnection between its tax treaties and transfer pricing legislation and may apply clarifications retroactive to July 2004. Finally, the paper recognizes the differences between Australia’s approach of profit attribution to branches and the OECD’s “functionally separate enterprise” approach.

Canada: GE Capital Canada – Crown’s Appeal Dismissed

On December 15, 2010, Canada’s Federal Court of Appeal (FCA) dismissed the Crown’s appeal of the Tax Court of Canada (TCC) 2009 judgment in favor of the taxpayer, General Electric Capital Canada, Inc. (GECC). This concludes a landmark case regarding the treatment of intercompany financial guarantees. The Canada Revenue Agency (CRA) had disallowed GECC’s deductions of guarantee fees on the grounds that the explicit financial guarantee provided by General Electric U.S. (GEUS) did not provide a benefit to GECC. The CRA argued GEUS would have provided financial support to GECC with or without the explicit guarantee, asserting financial guarantees are implicit by nature.

Ultimately, the TCC determined and the FCA confirmed GEUS’ explicit guarantee did provide an incremental benefit to GECC and that the guarantee fee charged did not exceed an arm’s-length price. The TCC’s 2009 judgment relied on the “yield approach” (also commonly called the “interest-saved approach”) to determine the total benefit of the intercompany guarantee, i.e., the yield spread. The yield spread was calculated by comparing the actual cost of GECC’s third-party financing with an explicit guarantee to its estimated cost of financing without the explicit guarantee. This required a credit rating assessment of GECC to estimate GECC’s cost of finance without the explicit guarantee. The TCC determined and FCA confirmed implicit support would be considered by a third party when pricing an arm’s-length guarantee fee. As such, in applying the yield approach, the TCC estimated GECC’s cost of third-party finance without the explicit guarantee based on GECC’s credit rating inclusive of implicit support, rather than on a standalone basis.

With the GECC case serving as a precedent, analysis of intercompany guarantee fees should incorporate the concept of implicit support. Under this concept, the borrower’s credit rating would lie between its credit rating on a standalone basis and that of its parent. The yield approach provides an acceptable method to determine the benefit provided by the parent’s guarantee to its subsidiary, but it does not calculate the market price of intercompany guarantees. As the GECC case stopped short of determining an arm’s-length guarantee fee, the TCC and FCA have not yet suggested the preferred approaches to determine arm’s-length guarantee fees.

Estonia: Rule Revisions Require Documentation from More Multinationals

Estonia’s formal transfer pricing legislation (Article 53), which relies heavily upon the OECD Guidelines, has been effective as of January 1, 2007. Prior to the adoption of Article 53, the Estonian Tax and Customs Board (ETCB) rarely challenged Estonian taxpayers on transfer pricing matters. However, as the ETCB has built its transfer pricing expertise in recent years, it also increased its enforcement of transfer pricing regulations. According to KPMG’s Estonian entity, the number of transfer pricing audits conducted by the ETCB was expected to have doubled in 2010 compared to 2008 and 2009.

On January 1, 2011, new amendments to Estonia’s transfer pricing regulations took effect. The most significant change was the broadening of the previously limited definition of what constitutes related parties with respect to transaction participants in a business contract. Under the new amendment, entities now are to be considered related parties through common business interest or “dominant influence” of one of the partners over others. Presumably, with a broader definition of related parties, a greater number of Estonian business entities will be required to abide by the Estonian transfer pricing legislation, which includes certain documentation requirements.

Furthermore, the new amendments more clearly define the terms “transfer price” and “market price.” The term transfer price is now defined as the value of a transaction between related parties, while the term market price has been defined as the value of a business contract between unrelated parties.

France: Release of Guidance on 2010 Documentation Requirements

During January 2011, the French Tax Authorities (FTA) issued the final administrative guidelines regarding transfer pricing (Instruction 4 A-10-10). They are an interpretation of articles L13 AA and L13 AB of the French Tax Procedure Code (FTPC), which went into effect for tax years beginning on or after January 1, 2010. The revised rules apply to entities meeting any of the following requirements:

  • Gross annual revenues or gross assets equal to or exceeding €400 million (approximately $520 million)
  • The entity directly or indirectly owns at least 50 percent of companies meeting the €400 million criteria
  • More than 50 percent of the entity’s capital or voting rights are owned, directly or indirectly, by French or foreign entities meeting the €400 million criteria
  • The entity benefits from the regime of worldwide tax consolidation in France
  • The entity is in a consolidated tax group in France when at least one company of the group meets any of the above criteria

The new guidelines rely on the OECD Guidelines to define the arm’s-length standard and methods to prepare transfer pricing documentation. The French transfer pricing guidelines state transfer pricing documentation must be prepared contemporaneously and must be provided within 30 days of a written request by the FTA during an audit. French transfer pricing documentation can be prepared in any language, but the FTA may require translation into French. The FTA’s final administrative guidelines on transfer pricing allows for penalties of up to 5 percent of the transfer pricing adjustment for each audited year, with minimum penalty of €10,000. Companies with French affiliates need to evaluate French transfer pricing documentation needs annually.

Italy: Government Issues Revisions to the Relatively New Transfer Pricing Regime

On September 29, 2010, the Italian Revenue Agency (IRA) established a new transfer pricing documentation regime under Regulation 2010/137654, which provides penalty protection for taxpayers that have prepared and maintained sufficient documentation. In addition, the IRA introduced new transfer pricing guidelines under Circular No. 58/E on December 15, 2010. Circular No. 58/E updates Italy’s original guidelines, introduced in 1980, and provides further explanation of the documentation requirements under Regulation 2010/137654.

Regulation 2010/137654 specifies who is required to prepare transfer pricing documentation and what information is required to achieve penalty protection. Italian taxpayers meeting these documentation requirements may avoid administrative penalties of 100 percent to 200 percent of unpaid tax resulting from an IRA-imposed income adjustment. Italian entities that are holding or subholding companies are required to prepare a master file containing documents pertaining to the taxpayer’s worldwide group. In addition, a country-specific file is required that must provide items such as a description of the local entity’s business, industry and intercompany transactions, as well as provide a detailed discussion regarding the selection of transfer pricing method and comparability analysis related to the relevant intercompany transactions. Circular No. 58 implies cooperation with the IRA and good faith efforts to prepare documentation will be factored into decisions whether to impose transfer pricing penalties.

Under Circular No. 58/E, the transfer pricing rules have been revised to be consistent with the revised transfer pricing guidelines issued by the OECD on July 22, 2010. The original Italian guidelines exalted traditional methods above income-based methods. The updated Italian guidelines, in certain circumstances, eliminate this hierarchy and allow selection of the most appropriate method given the transaction circumstances.

Korea: Better Alignment of Customs & Transfer Pricing Rules

Multinational corporations with subsidiaries in Korea and Korean companies purchasing goods from foreign related parties often face difficulties due to differences between Korea’s transfer pricing rules under income tax law and customs valuation rules under customs law. For example, if during a transfer pricing audit, a Korean importer is determined to have underreported income due to an overstated transfer price, it is often difficult for the importer to receive a refund on the applicable customs duties. In contrast, if the transfer price paid by the importer is subsequently raised due to a transfer pricing audit, the Korean Customs Service (KCS) often charges the importer the additional customs duties as well as any related penalties.

To better align Korea’s tax and customs laws and increase cooperation between the Korean National Tax Service (NTS) and KCS, a task force was organized by the Korean Ministry of Strategy and Finance (MOSF) in early 2011. On September 7, the MOSF announced proposals based on the task force’s instructions that would amend the Law for Coordination of International Tax Affairs (LCITA) and the Customs Act. The amendment is expected to take effect January 1, 2012.

The most significant change in the proposal is the provision of correlative adjustments between transfer pricing and customs value for import transactions. If the NTS or KCS makes an adjustment on a related-party import transaction and the taxpayer files a refund request to the other authority, the other authority must make a correlative adjustment if it views the adjusted price as appropriate. If the KCS or NTS views the price adjustment made by the other authority as inappropriate, the two authorities must come to a compromise.

Other major amendments included in the proposal include:

  • Opportunity to present taxpayer’s opinion in determining customs value
  • Improvement on profit and general expense ratio under Method 4 of customs valuation
  • Exemption from penalties in relation to Advance Customs Valuation Arrangement
  • Establishment of a Customs Ruling Examination Committee
  • Establishment of a duty amendment system

The proposal represents a positive development in the Korean transfer pricing environment, as it reduces the possibility of a taxpayer being unfairly assessed additional customs or taxes in the event of an adjustment by either authority.

Luxembourg: Circular Issued on Advance Rulings for Finance Companies

A circular (Circular L.I.R. No. 164/2) affecting multinational enterprises with financing arrangements involving a Luxembourg entity was issued by the Luxembourg tax authorities on January 28, 2011. Luxembourg, like the Netherlands, has been a preferred jurisdiction for intercompany financing arrangements, and many multinationals have obtained informal rulings covering their intercompany financing arrangements.

The new requirements were a result of pressure from the European Union to harmonize the pricing approach for financing companies. The circular specifies companies wishing to obtain advance clearance on their intercompany financing arrangements must meet more stringent requirements in order to qualify. The rules necessitate the Luxembourg company must have significant substance in Luxembourg and must bear real economic risks related to its financing activities. The substance requirement necessitates:  the Luxembourg company’s board of directors be comprised of Luxembourg residents—or nonresidents with a professional activity in Luxembourg—who have decision-making ability; the key management decisions should be made in Luxembourg; the entity must not be considered a tax resident of another country; and the entity must have a Luxembourg bank account or a bank account with a Luxembourg bank with a foreign branch. A ruling, which is valid for five years, only will be granted if the above conditions are met and an OECD-compliant transfer pricing study, which includes a functional analysis, is prepared.

Malaysia: New Intercompany Disclosure Form Launched in Malaysia

In July 2011, the Inland Revenue Board’s (IRB) Multinational Tax Department (MTD) introduced Form MNE [1/2011] in an effort to increase transfer pricing compliance by multinational companies under section 140A of Malaysia’s Income Tax Act, 1967. While this form does not establish formal transfer pricing rules, it is regarded as a step toward prescribed transfer pricing regulation in Malaysia.

Form MNE [1/2011] is divided into four sections:  General Information, Related Party Transactions, Intercompany Financing and Other Information. The General Information section requests information related to the taxpayer’s legal entity structure and details regarding the taxpayer’s dealings with related parties. The Related Party Transactions section asks for information regarding intercompany transaction volumes in relation to tangible goods, intangible assets, services, interest and guarantee fees. The Intercompany Financing section requests disclosure and details of the financing arrangements between foreign related parties and information about whether this financial assistance is interest bearing or interest free. The Other Information section requests a functional characterization of the Malaysian entity and an indication of whether the company has prepared contemporaneous transfer pricing documentation for the current year; outdated transfer pricing documentation would need to be updated for a positive response to the latter request.

Company data from Form MNE [1/2011] will enable the MTD to target companies engaging in significant related-party transactions, consistently reporting losses or poor profits and lacking transfer pricing documentation for audit. The IRB has advised taxpayers to maintain current documentation or pursue advance pricing agreements to avoid uncertainty and potential costs related to transfer pricing audits.

People’s Republic of China: Assault Continues on Multinational Companies

China’s transfer pricing laws took effect January 1, 2008. There usually is a lag between the enactment of the new transfer pricing rules and vigorous enforcement. However, the State Administration of Taxation (SAT) has been aggressively auditing the transfer pricing arrangements for inbound multinational enterprises as part of a concerted enforcement effort.

In a recent turn of events, the SAT has started to compile information from its audits into a database. According to the Deputy Chief of SAT’s Anti-Avoidance Division, more than 1,000 audit cases will be added to the database. The information will be used as ‘secret comparables’ during the course of transfer pricing audits where publicly available data is not available or is not sufficient. The use of secret comparables is permissible in China. Taxpayers are at a distinct disadvantage when secret comparables are used as the basis of the tax authority’s position, as taxpayers have no ability to review the information to determine if it is on par.

According to an SAT official, a number of taxpayers are producing inadequate transfer pricing documentation. The SAT is working on a template to enable local tax inspectors to assess the transfer pricing documentation. Circular No. (2010) 323, issued in July 2010, requires local tax authorities to review and grade at least 10 percent of documentation.

Qatar: Transfer Pricing Principles Introduced

The introduction of self-assessment tax regime in Qatar also included some transfer pricing provisions. Companies registered in the Qatar Financial Center (QFC) must pay a flat corporate income tax of 10 percent. Companies operating in the QFC are largely in the banking, asset management, insurance and reinsurance sectors.

The new rules provide a definition of what constitutes related parties, i.e., control, introduce the arm’s-length principle and provide a process for advance rulings and relief from double taxation. The new rules enable tax authorities to adjust non-arm’s-length intercompany transactions for companies located in the QFC and outside of the QFC using arm’s-length principles. The new rules, retroactive to January 1, 2010, do not require taxpayers to maintain transfer pricing documentation.

Russia: New Rules Require Increased Transfer Pricing Documentation

With the introduction of Federal Law No. 227-FZ by the Russian Ministry of Finance in July 2011, Russia’s transfer pricing rules have been amended to include additional technical detail and increased consistency with OECD Guidelines.

Some of the noteworthy changes to the Russian transfer pricing regulations include:

  • The introduction of the arm’s-length principle as the standard for analyzing intercompany transactions
  • Augmentation of the number of accepted transfer pricing methodologies
  • A reduction in the list of transaction types subject to Russian transfer pricing regulations
  • An expanded definition of the term “related parties,” including an increase in the direct or indirect ownership threshold from 20 percent to 25 percent
  • Elimination of the safe harbor that previously allowed controlled prices to deviate by up to 20 percent from current arm’s-length market prices
  • An expanded list of approved sources from which data may be obtained for purposes of determining an arm’s-length transfer price

Also outlined in the 2012 regulations is the transfer pricing documentation requirements. Taxpayers will be required to prepare transfer documentation for related-party transactions in which the total income received by the taxpayer from all controlled transactions with the same related party exceeds RUB 100 million (USD $3.6 million) in 2012 and RUB 80 million (USD $2.9 million) in 2013. After 2013, documentation will be required for all related-party transactions.

The 2012 regulations also include details about penalties for Russian taxpayers who underpay taxes due to the use of non-arm’s-length transfer prices. However, the penalties will not go into effect until 2014. Between 2014 and 2016, a penalty of 20 percent of the additional tax payable may be imposed on noncompliant taxpayers. Beginning in 2017 and moving forward, the penalty will be increased to 40 percent of the additional tax payable.

Turkey: Documentation Requirements Increased

In November 2010, the Turkish Tax Authority (TTA) published guidelines that further clarify transfer pricing subjects covered in Article 13 of the Turkish Corporate Income Tax Law.

In 2007, the TTA published the General Communiqué Regarding Disguised Income Distribution via Transfer Pricing, which provided details and clarification of Turkey’s formal transfer pricing rules located in Article 13 of the Turkish Corporate Income Tax Law. The November 2010 publication by the TTA contained guidelines further clarifying subjects covered in the transfer pricing communiqué and outlining Turkey’s transfer pricing documentation requirements in greater detail.

The TTA’s guidelines maintain Turkish taxpayers should prepare transfer pricing documentation on an annual basis, covering all intercompany transactions regardless of materiality. The 2010 guidelines place further emphasis on the TTA’s preference for the use of internal comparables to determine an arm’s-length transfer price. However, for situations requiring third-party comparable searches, the TTA has indicated it may further investigate taxpayers with transfer pricing report draft dates substantially differs from the documented performance date of any comparable searches.

The guidelines also provide a sample transfer pricing report outlining what information should be included in each section of a complete transfer pricing report. To avoid future conflicts with taxpayers, the TTA has indicated it would like taxpayers to strictly follow the format of the provided sample transfer report when assembling their own documentation.

United Kingdom: OECD Guideline Revisions Formally Adopted into Law

Her Majesty’s Revenue and Customs (HMRC) has issued a briefing about proposed revisions of its transfer pricing rules found in Schedule 28AA to the Income and Corporation Taxes Act 1988 (for accounting periods ending on or after July 1, 1999). As the OECD Guidelines were modified and finalized in July 2010, the HMRC wants to synchronize its transfer pricing rules with the 2010 revised OECD Guidelines. This should help mitigate double taxation risk for businesses with cross-border activities.

HMRC also is examining its stance on taxation of high-technology intangible property (IP) and its link to research and development. In particular, it has the idea of creating a Patent Box tax regime to locate high-technology jobs and IP in the U.K. In 2011, the HMRC consulted with corporations and other stakeholders for input on this idea.

United States: Recent IRS Transfer Pricing Developments

The IRS has continued efforts to enhance its international tax capabilities, with specific efforts to bolster its transfer pricing enforcement capability. The IRS intends to more effectively identify, examine and resolve transfer pricing cases through the recent reorganization of the Large & Mid-Sized Business (LMSB) division, the hiring of additional technical transfer pricing personnel and the addition of a transfer pricing director. With the expected increase in transfer pricing-focused audits, taxpayers increasingly will benefit from sensible transfer pricing documentation to justify their intercompany pricing.

In October 2010, the IRS reorganized the LMSB division into the Large Business & International (LB&I) division, signifying renewed attempts to integrate and coordinate international tax compliance efforts. The IRS’ international subdivision will add nearly 900 employees, including examiners, transfer pricing economists and technical staff, to the 600 employees in place at the end of 2010. New Transfer Pricing Director Samuel Maruca has been tasked with developing and managing the international subdivision’s transfer pricing strategy, training initiatives and operating policies, as well as the soon-to-be combined Advance Pricing Agreement (APA) and Competent Authority programs. To better coordinate the efforts of the transfer pricing national office and the field, the LB&I division intends to create a transfer pricing advisory group organized geographically, comprising 40 to 60 personnel.

According to Michael Danilack, the IRS Deputy Commissioner (International), there will be an enhanced focus on intercompany transactions of foreign-controlled U.S. corporations and U.S. branches of foreign corporations. With Japan reducing its statutory tax rate, the U.S. will soon have the highest statutory tax rate in the world, and the IRS will be dedicating resources to challenge intercompany transactions that avoid U.S. tax by inappropriately shifting income back to the taxpayer’s home country.


In 2010, Vietnam issued new transfer pricing guidelines outlined in Circular 66 (2010) to replace Circular 117 (2005), as a part of an initiative to enforce Vietnam’s transfer pricing regulations. Circular 66 introduced several changes that strengthened the country’s transfer pricing requirements. During 2011, the Vietnamese General Department of Taxation (VGDT) issued a report citing significant gains in tax revenues due to the release of the 2010 transfer pricing rules and increased audits resulting in transfer pricing assessments. The VGDT also announced it will conduct further audits of the 2008 to 2010 tax years; companies with losses or low profits automatically will be audited.

As part of the compliance initiative, the VGDT also issued surveys asking taxpayers to provide certain company data for 2006–2010, including financial indicators, transaction descriptions and transaction volumes. In addition, the VGDT inquired about the location of these related parties, transfer pricing methods adopted in connection with the surveyed transactions and each company’s compliance procedures implemented after the introduction of Circular 66.

To learn more about transfer pricing solutions or to discuss your company’s current transfer pricing positions, please contact Will James (, David Whitmer ( or your BKD advisor.


Article reprinted with permission from BKD, LLP,  All rights reserved.

Published in Dallas

During a panel discussion at a recent governance conference, IRS officials named fringe benefits as the most common area for intermediate sanctions on exempt organizations. Intermediate sanctions include excise taxes assessed on disqualified persons and exempt organization managers to limit private inurement to disqualified persons. Excise taxes on excess benefits under the intermediate sanctions rules can be extreme, as they are designed to effectively punish private inurement without revoking an organization’s tax exemption. However, the IRS may still seek exemption revocation when excess benefit transactions arise after enforcing the intermediate sanctions rules.

Organizations must include fringe benefits in compensation to all employees, especially disqualified persons, i.e., those in a position to exercise substantial influence over the affairs of the organization at any time during the preceding five-year period. Fringe benefits not treated as income for chief executives may be deemed automatic excess benefit transactions. Automatic excess benefits arise when an economic benefit for an executive or disqualified person should be treated as compensation but is not, even in situations where total compensation would have been reasonable had the benefit been originally included in income.

There must be clear intent the benefit is compensation, with written contemporaneous substantiation that the value was intended as compensation. It is an excess benefit and subject to intermediate sanctions if not approved as compensation through the organization’s policies and treated as such in the books and records. Intent to treat the benefit as compensation is accomplished when the organization includes the benefit in the disqualified person’s income and the person reports such income on personal income tax returns. An organization also may establish intent after the fact by amending its Form 990 at any time before the IRS begins an examination of the organization or disqualified person. Failing to do so before the IRS challenges the transaction will likely result in an excess benefit treatment by the IRS.

The IRS may also identify excess benefit transactions associated with fringe benefits through efforts to identify uncollected employment taxes. The IRS National Research Program is conducting a three-year study focusing on uncollected employment taxes including taxes due to the omission of taxable fringe benefits, as well as other forms of compensation.

Another focus area in the employee compensation arena is reimbursable expenses reportable as taxable compensation. Failure by the employer to properly draft and maintain accountable plans and/or failure by the employee to properly substantiate reimbursed expenses could result in unintended taxable compensation to the employee. Employers should maintain accountable plans requiring substantiation of reimbursable expenses. Accountable plans are reimbursement or expense-allowance arrangements covering deductible expenses for federal purposes in which the employee must account for the expenses and return any excess allowance or reimbursement within a reasonable time period. The panel stressed expense reimbursements must be periodically reviewed by governing boards for compliance. Also, the panel pointed out, corporate credit card billing statements are not sufficient to meet the substantiation requirements of an accountable expense reimbursement plan; original receipts are necessary.

Common instances of fringe benefits that should be included as taxable wages for disqualified persons include personal use of equipment and facilities. Organizations should consider the following steps to make sure fringe benefit treatment is appropriate and to avoid excess benefit transaction treatment:

  • A compensation committee, comprising governing board members not related to or controlled by the chief executives, should review reasonableness of compensation packages for the organization’s highest-ranking officers.
  • Properly document all transactions.
  • Determine applicable state laws for compliance.

Organizations should proceed cautiously when providing fringe benefits for disqualified persons and should properly document all transactions. It is important all reimbursable expenses include proper substantiation for reimbursement. Because the excise tax resulting from intermediate sanctions is imposed on both the disqualified person and any organization managers who approved the payment, proper reporting of employee fringe benefits to key executives is even more critical.

Contact your BKD advisor with any questions you have regarding taxability of fringe benefits or the intermediate sanctions rules.

Article reprinted with permission from BKD, LLP, All rights reserved.

Published in Dallas
Wednesday, 02 November 2011 00:06

Claiming the New Hire Retention Credit

As 2011 draws to a close, now is a good time to start reviewing all available tax credits to determine if implementation before year-end is warranted. One easily overlooked yet extremely powerful credit is the New Hire Retention Credit. This credit was included in the Hiring Incentives to Restore Employment Act of 2010 (HIRE), signed into law on March 18, 2010, and allows a credit up to $1,000 for each qualifying retained worker. HIRE does not limit the number of qualifying retained workers.

The credit applies to qualified employers for tax years ending after March 18, 2010, that hired and retained qualified workers during a consecutive 52-week period starting after February 3, 2010, and ending before January 1, 2011. The credit is the lesser of $1,000 or 6.2 percent of the employee’s wages paid for the consecutive 52-week period. Wages are defined as wages for income tax withholding purposes. In addition, the credit only can be claimed if the employee’s wages for the second consecutive 26-week period are not less than 80 percent of the employee’s wages for the first consecutive 26-week period.

To be a qualifying retained worker, the part-time or full-time employee:

  • must begin employment after February 3, 2010, and before January 1, 2011
  • must complete Form W-11 or a similar statement under penalties of perjury declaring that the employee was not employed more than 40 hours during the 60-day period ending on the hire date
  • cannot be employed to replace another employee, unless the previous employee was terminated for cause (including downsizing) or voluntarily terminated
  • cannot be a relative of the taxpayer employer

The credit is part of the general business credit under Internal Revenue Code Section 38(b) and is claimed in the period the consecutive 52-week period is first satisfied. For calendar-year taxpayers, this will be the 2011 tax year; for fiscal-year taxpayers, the credit can be claimed over two years.  Form 5884-B is used to calculate the credit, and Form 3800 is used to claim the credit. Partnerships and S corporations calculate the credit, and pass it to the owners via Schedule K-1. No part of this specific credit can be carried back to any tax year beginning before March 18, 2010, although any unused credit can be carried forward 20 years.

For help determining the potential benefits of this or other credits for your business, contact your BKD tax advisor or e-mail Bryan Handley at

Article reprinted with permission from BKD, LLP, All rights reserved.

Published in Dallas
Monday, 14 May 2012 15:15

Auditing at the speed of business

Companies are affected by external environments that are constantly changing due to new technologies, regulations and economic conditions. With the speed of these changes, audit committees and management are demanding their internal audit functions to provide increased, faster assurance.

To meet these growing expectations, internal audit groups can no longer afford to dedicate significant resources to routine functions as opposed to focusing on new risks arising from these changing environments. A good way to provide assurance on high-volume, stable processes — including procurement, AP, AR, etc. — while reducing resource requirements, is through continuous auditing.

What is continuous auditing?

Continuous auditing is the routine use of electronic auditing tools and methods. Electronic tools offer advantages over the traditional audit process, such as the ability to effectively and efficiently analyze an entire data set, rather than testing by sampling. They also allow you to automate these processes for repetitive performance, creating the ability to schedule analyses at any time.

How continuous is continuous?

“Continuous” has different meanings depending on the business process audited. For example, you may perform a daily audit of potential duplicate invoices but only search for vendors related to employees once a month. In both situations, the audits are on a routine, continual basis. The key is identifying the risk inherent in the process and determining how quickly you can identify potential problems. That speed is the definition of continuous for that process and is, essentially, the speed of your business.

Continuous auditing versus continuous monitoring

The phrases “continuous auditing” and “continuous monitoring” are commonly used interchangeably, but differentiating between the two is important for organizations looking to implement continuous auditing. While the underlying principles are very similar, process ownership and problem resolution differ significantly. Internal audit owns the continuous auditing process and provides results to process owners, e.g., accounts payable directors, for resolution. Management is responsible for continuous monitoring and resolution of identified problems.

Despite these differences, the two processes are closely related, and many procedures are the same in both. Internal audit groups often provide significant value to their companies by developing, testing and finalizing a continuous auditing process; once the kinks are worked out, they provide management with that process as their continuous monitoring process. Continuous auditing and monitoring processes are inversely related — the more monitoring management performs, the less auditing is needed by internal audit. This is a win-win proposition: Internal audit has just provided value to their company while reducing the resource commitment needed to maintain assurance over that control environment.

Case Study

A multibillion-dollar manufacturing company’s internal audit department performed many electronic tests on an ad hoc basis, using sampling to accomplish its goals. It decided to implement continuous auditing for related-party testing and duplicate payment testing within accounts payable. After identifying risks and designing the tests accordingly, the company can now analyze its entire vendor and employee population (more than 100,000 vendors and nearly 10,000 employees) for potential relationships. In addition, it can analyze more than 2 million payment records for potential duplicate payments with 100 percent coverage.

Getting started

To begin implementing continuous auditing in your organization, there are three key items to address. The first is risk. A well-designed continuous audit program focuses on key organizational risks. You also will need to identify an electronic audit tool that meets your organization’s needs. With multiple tools available, it is important to research tools and consider the features in relation to your organization’s risks and areas of personnel expertise. Finally, determine what data are available in your accounting systems. This may include conversations with your information technology staff and process owners. This process is integral in designing your continuous auditing program.

After addressing these areas, you are ready to embark on the journey to continuous auditing — auditing at the speed of your business.

For more information, contact a BKD advisor. To reach Selina Wilbur, mail to To reach Jeremy Clopton, mail to

Article reprinted with permission from BKD, LLP, All rights reserved.


Published in Dallas
Thursday, 31 January 2013 15:13


Led by Managing Partner David Hayob, BKD Houston has 151 personnel, including 16 partners and 60 CPAs, who provide accounting advisory services to more than 3,000 clients and offer focused solutions for individuals. Their professionals serve industries in health care, government-not-for-profits, manufacturing and distribution, construction, real estate and energy. They are located in the heart of the Galleria.

BKD offers insightful solutions, ideas, attention to detail, expertise and results — they call it unmatched client service.

At BKD, they understand you want an advisor who provides more than just accounting solutions. Their CPAs and Advisors offer specialized skills and expertise, as well as the winning attitude, character and communication skills necessary to help clients achieve their objectives. Accounting for numbers — accurately, objectively and with integrity — is at the heart of their business. But they are also professional, prepared, attentive and ready to deliver their services with PRIDE (passion, respect, integrity, discipline and excellence).

With BKD, you get a trusted, top-tier national accounting firm that understands your business and delivers the resources you need with a service style you will value.

Smart Business spoke with Hayob about how BKD Houston has been able to overcome challenges and achieve success.

Give us an example of a business challenge your organization faced, as well as how you overcame it.

We have had significant growth in our health care practice, and we needed to find someone with the right expertise to lead that area in Houston. We identified someone who had been with a large international firm and was interested in relocating, and the firm actually brought him in and put him in the Houston office. We also had a partner here transfer to Dallas to lead that office, helping with our goal of building a statewide health care practice. We like to think we will do whatever it takes, within reason, to meet the needs of our clients.

In what ways are you an innovating leader, and how does your organization employ innovation to be on the leading edge?

Our approach to customer service — the concept of writing a book about our philosophy of unmatched client service and sharing it with every employee, requiring every employee to read it and share that with our clients — is something unique. A lot of people talk about good service, customer service, client service, but not very many people do much about it. Even though the book was written a few years ago, it continues to be time-tested and useful every day, every week, every month. We try to differentiate our brand of client service from our competitors and to our customers.

What is the greatest lesson you have learned, and how have you applied it?

If you really get the facts and understand what is going on, you can make good decisions. So often, people try to make decisions without all the facts, and that is because either people will not give you the facts or you have not worked hard enough to uncover them. People talk about how hard decision-making is, but if you can really get all the facts together, decision making is not that difficult. Trying to make decisions without the facts is extremely difficult. You are better off if you are honest and truthful with your employees, clients, coworkers, partners and bosses, and in turn, they will be more open, honest and truthful with you.

How does your organization make a significant impact on the community and regional economy?

We have definitely attempted to make an impact on the community. We are active members of the Greater Houston Partnership, and we have a number of our partners and managers in leadership roles with that organization. We also have numerous people on charitable boards in the area.

Through our charitable arm, the BKD Foundation, we have been lead sponsor of the Texas Children's Hospital Kids' Fun Run for the last five years. We have also been one of the leaders in fundraising and involvement with the Susan G. Komen Houston Race for the Cure. The foundation's main goal is to support causes in the communities in which we work, and we have tried to do that.

How have you added "value" to the products and services you provide to customers and clients?

We start with integrity first. With some other firms, clients do not get the truth. However, if you bring honest, truthful information to the client, that is added value. Our true expertise adds value as well. The fact that we have partners, managers and in-charges on nearly every project who have significant industry focus — whether it be energy, banking, health care, manufacturing, government or real estate – brings value to the product.

We also operate under the idea of principled innovation — we bring innovative solutions to clients with a principled base. We do not let innovation lead us into new, untested, unproved or unprincipled solutions; we try to retain true professionalism in the solutions we offer.

What is your philosophy on going "above and beyond" for customer service?

Client service is at the heart of everything we do. We have a service contract with our clients that says we will offer the five core tenets of our philosophy: integrity first, true expertise, professional demeanor, responsive reliability and principled innovation. While it seems on the surface to be a pretty simple concept, in practice it is not executed by very many people as well as it should be. We live those concepts every day, and it shows in our client service.

For more information, contact BKD Houston at 713.499.4600 or visit

Published in Houston