I was fortunate enough to spend a couple of days last week in discussion with the head of transfer pricing from a small developing country. One of the obstacles that I hadn’t previously understood was that it is sometimes very hard for tax authorities to prove in court that an offshore company is related to the company they’re auditing. Even when it’s obvious.
Part of the solution is to ensure that the definition of ‘related party’ in domestic law is clear and wide enough, part of it is to require related party disclosures in tax returns (the latter was also a recommendation in the committee’s report), and a further part is to make use of tax treaties that allow for information exchange (which is a last resort, because it’s so time consuming). But in the case of multinational companies, tax officials’ jobs can also be made much easier by the multinational’s country of incorporation.