Tax authorities are taking a closer look at payment transfers for administrative and managerial services provided by international subsidiaries to their home offices or related companies, according to a new survey by accountants Ernst & Young.

The officials are wary of companies which typically try to lessen their taxes by allowing their overseas subsidiaries to charge them high prices for such services as a means of transferring money out of a high tax jurisdiction to one with lower or no taxes.

The issue is especially important for tax havens such as Bermuda as many offshore subsidiaries are set up here to provide administrative and managerial services for their onshore home offices or partners.

In 1996 companies in Bermuda received $550 million in receipts for the provision of professional, managerial, and technical services, providing the major to the Island's positive balance of payments.

Of the multinational corporations surveyed by Ernst & Young 52 percent cited services as the transactions they believe are most susceptible to disputes with tax officials. The survey also found multinationals believed that transfer pricing is expected to remain their number one tax concern over the next two years.

"This is not surprising, given the volume of cross-border trade taking place between related parties around the world and the fact that many multinational corporations generate as much or more taxable income outside their home country as within,'' Patrick Hackenberg, manager of Ernst & Young in Bermuda, said. "As a by-product of globalisation, multinational corporations are struggling to make tax sense of their internationally integrated businesses.'' The survey found found that tax officials are tending more and more to query subsidiaries about the value of the services they provide as well as the arm's length nature of the payment from the related companies.

The disputes over transfer pricing -- what multinational affiliates charge one another when exchanging goods, property and services -- end up with the companies losing in half of the cases examined by tax authorities, according to the survey.

About 75 percent of the companies have already faced a tax examination and eight out of 10 expect to face one within the next two years.

But Ernst & Young found that few multinationals are taking strategic action to confront the issue if and when it does arise. The problem stems from the lack of international guidelines over how to price value added services done within a company's corporate structure.

"No one really knows what these services are worth,'' Mr. Hackenberg said.

Requirements vary widely from country to country. About 36 percent of the companies surveyed relied on US regulations, 34 percent on other overseas authorities, and 21 percent on Organisation for Economic Co-operation and Development guidelines.

"Transfer pricing is a business as well as a tax issue that needs to be considered in the boardroom,'' Mr. Hackenberg said. "Strategic decisions regarding products, location and supply chain matters affect tax planning and tax compliance in both home and subsidiary countries.'' Companies need to plan how to best transfer the most money to lower tax areas while remaining in compliance with the relevant tax authorities. Some companies may end up shortchanging their bottom lines by not being aggressive enough in pricing the value of the services provided by their subsidiaries, he said.

"Some companies might not be taking full advantage of bringing income to non-tax jurisdictions,'' he said.

Many accounting firms are now using economists to help them advise companies on how to put a price on the services provided.