What Is Transfer Pricing?

whatistransfer If your business has grown large enough to acquire or develop subsidiaries or affiliates, or your business operates commonly controlled companies under a larger corporate umbrella, you likely have significant internal cooperation between these various entities. It’s common to move goods and resources from one affiliate to another, but this exchange can’t be random. You must implement a transfer pricing policy that compensates, at “arm’s length,” whichever affiliate provides the goods, services, intangible property (e.g., technology), or loans.

Transfer pricing is the price paid in transactions between related or controlled parties. It must confirm with the arm’s length standard to avoid issues at tax time. WTP Advisors has years of experience providing global transfer pricing services and can guide you through the process from start to finish.

Transfer pricing is a significant international tax issue as it impacts where MNEs recognize taxable income. Whether you’ve had problems in the past with transfer pricing or are just now exploring the process, you can count on us to help things go smoothly. Schedule your consultation today to learn more about our services.

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Main Types of Controlled Transactions

The main types of intercompany transactions involve:

The sale of goods.
The provision of services, such as a central IT group providing global support services.
The transfer or sale of tangible and intangible assets, including the sale or license of technology.
Intercompany financing, such as intercompany loans, guarantee fees, and factoring.

Most countries require multinational enterprises (MNEs) to demonstrate that their intercompany transactions abide by the arm’s length principle. Their primary concern is whether the taxable entities operating in the country are recognizing their fair share of income.

The arm’s length principle, outlined in Article 9 of the OECD Model Tax Convention (referred to as the arm’s length standard in the U.S. tax code), is the underlying international standard most MNEs and tax administrations use to establish the pricing between affiliated entities. The arm’s length principle is satisfied when the price paid between related parties is the same as the price that would have been paid between unrelated parties under the same or similar economic circumstances. In short, companies must keep prices within an arm’s length range of prices established by applying transfer pricing methods.

The OECD published ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ (OECD Guidelines) based on the arm’s length principle. The OECD Guidelines provide guidance on the pricing of cross-border transactions between associated enterprises for tax purposes. Our team at WTP Advisors can explain what this means for your business and the extent to which a given transaction will pass scrutiny by tax authorities.

The Importance of Transfer Pricing for MNEs

Transfer pricing represents a major international tax planning opportunity and risk for many MNEs. With an increase in the volume and complexity of transactions among related parties and countries looking to increase tax revenue, tax authorities worldwide have increased their scrutiny on transfer pricing. The OECD has stated that, “In a global economy where MNEs play a prominent role, governments need to ensure that the MNEs are not artificially shifting taxable profits out of their jurisdiction; the taxable income reported by MNEs should reflect the economic activity undertaken in the countries in which they operate.”

Today, MNEs are encountering an increase in the number of transfer pricing-related tax audits and tax adjustments. This has brought transfer pricing to the forefront of attention for MNEs.

MNEs often get into trouble when they don’t take tax and transfer pricing into account when restructuring their supply chains. For instance:

A multi-country supply chain initiative can subject the company to a high global effective tax rate when locating important functions in high tax jurisdictions.
Some MNEs maintain transfer pricing policies that are not well aligned with their supply chains. These often result in tax structures that are not sustainable, as tax authorities can challenge a tax structure and transfer pricing model that lacks the business purpose of a supply chain initiative or substance (e.g., key functions that demonstrate the ability of a profit center entity to manage important supply chain risks).

Differences in transfer pricing documentation and approaches can vary significantly among countries. Consequently, taxable income reported from cross-border transactions may result in disputes with tax authorities. In addition to risks of double taxation associated with transfer pricing adjustments, MNEs face risks of non-deductible penalties and interest tax authorities of many countries can impose. MNEs must concurrently take both a global and a local approach to transfer pricing planning, risk management, and compliance.

Optimizing After-Tax Cash Flows by Aligning with Global Supply Chain Value Creation

MNEs can create sustainable tax-efficient operations by layering transfer pricing and tax planning with their supply chain initiatives. As MNEs expand or streamline their supply chains, they can make tax smart decisions about where to locate the value drivers and the important functions within their supply chains.

For instance, if it makes sense to create a regional headquarters or centralized services such as a strategic sourcing group, MNEs should consider the tax rates that their cash flows would be subjected to in the various jurisdictions. MNEs should keep in mind that there are significant differences in the tax rates levied by the countries they are operating in. As they decide on locations of important supply chain functions, they should perform their cost-benefit analyses on an after-tax basis. Our team has helped many expanding MNEs accomplish this.

Experienced Global Transfer Pricing Team

No matter your industry, structure, or goals, understanding the global transfer pricing landscape is important. Our team at WTP Advisors is here to help you navigate this complex landscape. With our support, you’ll be able to make decisions about your transfer pricing approach with confidence. Schedule your consultation today to learn how our team can help you achieve your goals to increase shareholder value.

Call Us: (866) 298-7829, ext. 702 Book a Consultation