Transfer pricing entails many different aspects, which can be overwhelming to say the least. Not necessarily because the term transfer pricing itself is unclear, but because it covers a wide variety of sub-topics. In this blog we will cover the fundamental aspects of transfer pricing. This is done from a practical point of view, so that it may be clear which transfer pricing (sub)topics are important to your company.
Defining transfer pricing
Fundamentally, transfer pricing can be described as the area of tax law concerned with the pricing of transactions between associated companies within a group (i.e., intercompany transactions). Essentially, this means that transfer pricing amounts to the allocation of profit between the countries in which the MNE has operational activities. The leading principle for transfer pricing, and unified in many international tax laws, is the ‘at arm’s length principle’. This means that the terms and conditions agreed upon in a transaction between related enterprises must be similar to those that would be agreed upon in a similar unrelated situation. As such, transfer pricing entails the determination of the profit allocation between legal entities within MNEs in accordance with the at arm’s length principle.
The relevance of transfer pricing
Transfer pricing is essential to companies operating in multiple countries. This is even more so given the increased focus of tax authorities on MNEs, which is partly driven by media and politics. This results in MNEs needing to comply with a great deal of legislation. A company’s tp policy must be in line with both international guidelines such as the OECD transfer pricing guidelines as well as the relevant national guidelines / legislation of all the countries in which they operate. This brings along quite some difficulties, but a sound transfer pricing policy and solid documentation will tackle these issues.
Transfer pricing is however, more than just another compliance check box. It is relevant to the core business of companies itself. For example, a sound transfer pricing policy will provide clear insight in which business or entity performs poorly. Transfer pricing should support the business and provide insights that help in making strategic decisions.
Main topics / services
We as Quantera Global (“QG”) have identified five main topics regarding transfer pricing. We will briefly explain what each of the topics consist of and give a brief insight on how we approach these topics in our daily practice:
- Compliance: transfer pricing compliance refers to meeting all international and national guidelines and legislations. We determine a compliance strategy that suits your strategy and risk appetite. Our cooperation form can be flexible and we use/provide technology to create an efficient and sustainable process. We can support you with the transfer pricing compliance requirements on a global basis including local files, benchmark studies and operational transfer pricing.
- Governance, design and strategy: this includes following business developments, setting-up appropriate governance mechanisms and designing a suitable and sustainable transfer pricing policy that supports the business.
- Controversy: this topic includes in essence both the handling of disputes that have emerged, but also the communication with tax authorities, effective handling of tax audits and audit readiness, i.e. anticipating which questions from tax authorities can come up and having appropriate answers readily available. We handle disputes between clients and one or more tax authorities on a daily basis and provide also flexible support as e.g. being a sparring partner.
- Rulings: a tax ruling is an agreement with a tax authority on how to interpret tax legislation for the specific facts and circumstances and provides simply put a quality stamp and certainty on your transfer pricing policy. An important type of ruling is the Advance Pricing Agreement (“APA”), which is a ruling to obtain prior clarity on the application of transfer pricing methods for a particular set of transactions. We support clients on a daily basis in obtaining (Bilateral) APAs and were for example asked by the European Union to develop the APA practice of two tax authorities. In addition, we support with innovation box rulings which provide eligible MNEs with direct monetary benefits.
- Financial transactions: regarding financial transactions your company may face challenges in setting at arm’s length prices for e.g., intercompany loans, guarantees and cash pooling structures, as well as preparing proper transfer pricing documentation. The attention towards financial transactions has increased, partly due to additional guidance on this topic issued by the OECD. Our specialist team can support your company in setting up your financial transactions policy, perform a baseline measurement of the current policy and analyse the potential risks and opportunities or support in separate items as substantiation for a specific intercompany loan.
How QG can help and challenges
In conclusion, transfer pricing is a topic which can be difficult to grasp due to the many aspects. For new clients, we generally start with a strategic meeting to provide them with a quick and efficient insight in what their key challenges may be and how to go about these.