National Transfer Pricing Lead, CBIZ and Transfer Pricing Lead, Kreston Global
David Whitmer has more than 20 years of experience in transfer pricing consulting services, primarily with large international accounting firms, covering transfer pricing planning, intellectual property valuation, financial modelling, and transfer-pricing disputes in a number of industries, including finance, chemicals, pharmaceuticals, software, manufacturing, services and tax-exempt organizations.
Transfer Pricing FAQs
April 22, 2022
What is transfer pricing?
In simple terms, transfer pricing is the process of setting the prices charged between associated enterprises in cross-border transactions, which can involve transfers of tangible goods, services, and intangible property, as well as financing transactions.
When a cross border transaction occurs between associated enterprises, tax administrations in the respective countries are especially interested to ensure that the taxable profits of multi-national enterprises (“MNEs”) are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country yield results that are consistent with the economic activity undertaken and the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.
What are the rules?
Each country has different transfer pricing rules, so it is important to speak to a country tax specialist to make sure you are following local country requirements. With only a few exceptions, most countries’ transfer pricing rules are based on the “arms-length” principle, where pricing between associated enterprises should reflect the prices that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances
The OECD has also published transfer pricing guidelines (“OECD Guidelines”) here for member countries and cooperating non-member countries to follow. Most countries’ transfer pricing rules are based on the OECD Guidelines, though there may be certain differences in interpretation, application, and administration among countries.
If the transfer price is not arm’s length, the tax administrator has the authority under the tax jurisdiction regulations to make adjustments by reallocating items of gross income, deductions, credits, or allowances in order to properly reflect income between the entities.
What is an example of transfer pricing?
The following case illustrates various examples of transfer pricing related issues:
A MNE group, ValveCo, is in the business of designing, producing, and selling valves. ParentCo is responsible for design, manufacture, and distribution in its territory. SubCo1 operates as a licensed producer in its jurisdiction (Transaction 1). SubCo1 performs certain development work under the direction of ParentCo (Transaction 2). SubCo1 purchases components from ParentCo to be used in its manufacturing process (Transaction 3). SubCo1 relies on ParentCo for certain management and administrative functions (Transaction 4), as well as funding of its operations (Transaction 5). SubCo2 purchases products from ParentCo and SubCo1 for resale to third-party customers in its jurisdiction (Transaction 6).
Who do the transfer pricing rules apply to?
The transfer pricing rules are relevant to MNEs with controlled transactions among associated enterprises in different tax jurisdictions. Uncontrolled transactions do not fall under transfer pricing rules. A transaction is controlled or enterprises are associated if one enterprise participates in the management, control, or ownership of another enterprise, or if the same people or enterprise participates in the management, control, or ownership of two enterprises (i.e., a situation with common ownership).
Are there exemptions?
A growing number of countries are implementing contemporaneous transfer pricing documentation requirements, meaning the transfer pricing documentation has to be prepared prior to the filing of the tax return for a given accounting period. However, certain jurisdictions do provide documentation exemptions for small and medium-sized enterprises. In addition, a handful of other countries do not require contemporaneous documentation. While these exemptions exist, the burden of proof remains with the taxpayer to demonstrate arm’s-length pricing. This supporting information may still be requested during a transfer pricing examination, and the intercompany pricing may be adjusted by the examiner to reflect an arms-length outcome.
How do you calculate transfer pricing?
As noted above, associated enterprises should price transactions in the same way that uncontrolled entities would price the same transactions under similar circumstances. In short, the arm’s-length principle requires the comparison of controlled transactions with uncontrolled transactions. Hence, transfer prices are calculated through “comparability analysis” or benchmarking analysis. Valid comparables or benchmarks may exist as transactions between an associated enterprise and third parties (i.e., internal comparables). Alternatively, external comparables may be applied in the form of external comparable uncontrolled transactions (where none of the parties involved are members of the MNE group) or independent comparable companies that perform similar functions to one of the associated enterprises (i.e., the tested party). Our transfer pricing specialists can evaluate the specified transfer pricing methods and comparability criteria to identify the most reliable transfer pricing approach for a specific client. For external comparables, our transfer pricing specialists have access to specially licensed databases to conduct our benchmarking research. Please contact your nearest Kreston Global office to assist with your transfer pricing compliance needs.
Is transfer pricing tax evasion?
The objective of transfer pricing rules is to prevent MNEs from arbitrarily shifting income to avoid paying taxes. According to the OECD Guidelines, the consideration of transfer pricing should not be confused with the consideration of problems of tax fraud or tax avoidance, even though transfer pricing policies may be used for such purposes. Application of transfer pricing in accordance with the arm’s-length principle and the preparation of supporting documentation is considered to maintain tax compliance and good practice; failure to do so may result in income adjustments, potential double taxation, interest, and penalties.
How can Kreston Global help my company with transfer pricing?
Kreston firms can help support your company to adhere to country-based transfer pricing rules with the following core services:
- Develop and/or optimize your transfer pricing methodologies with our planning expertise and benchmarking solutions.
- Assist with transfer pricing documentation to ensure compliance with country specific regulations.
- Perform analysis and modelling of intercompany services charges.
- Perform benchmarking searches for royalty and license agreements, intercompany interest rates and comparable company samples.
- Perform valuations of intellectual property and evaluations of migration strategies.
Please search for your nearest Kreston Global office here and they can help signpost you to the countries you need support in.