Losses
With the establishment of the Risk & Intelligence Unit within Inland Revenue, more in-depth analysis is being carried out into losses and their underlying causes. There could be any number of reasons for a one-off loss:
- bad management
- the pursuit of a deliberate market penetration strategy
- the corporate is new to an industry or just starting up
- a trough in the business cycle
- heavy involvement in research and development, capital expansion and/or promotion
- excessive risk-taking, and
- effects of intervention by government.
If a MNE is returning a loss, it is important that the reasons are quantified and substantiated with comprehensive documentation. If poor management is the cause, we would not expect to find executives being rewarded with increased salaries and bonuses. Most business strategies are geared to making operations more efficient and/or competitive with an overarching objective of increasing profitability in the medium term - contemporaneous analyses should be kept to support the position taken.
A sustained period of losses is indicative of commercially unrealistic transfer pricing policies. This is especially so if the company exhibits a low level of operational functionality (ie nothing more than routine functions, assets and risks). In such cases, serious consideration will be given to undertaking further audit work with a view to making transfer pricing adjustments.
If there is a major downwards shift in profitability, our preference is to discuss such problems early and get the numbers right, rather than pursuing possibly time-consuming and unproductive audit inquiries later.
Date published: 14 May 2008
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