Transfer pricing
In the age of globalisation, businesses often set up operations in multiple countries, exchanging goods, services, and intangible properties within their international groups. Transfer pricing refers to the prices charged for these intercompany transactions. The objective? To ensure that each entity in the group earns an appropriate return on its functions, assets, and risks. Yet, with shifting global regulations and diverse tax requirements, this can be a complex terrain for businesses to navigate.
What is Transfer Pricing?
Transfer pricing delves into the intricate setting of prices for transactions between related entities, be it between parent and subsidiary companies or diverse divisions that operate across borders. The principle behind transfer pricing rules, implemented by numerous countries, is to ensure that multinational businesses don’t manipulate profit allocations to benefit from lower tax jurisdictions. The central idea is that the reported tax in any nation should align with its actual economic activities.
At its core, the principle guiding these rules is the “arm’s length principle”, which dictates that any transaction between related entities should be priced as if it were between independent entities under identical situations.
Transfer pricing isn’t limited to tangible goods; it extends to intellectual assets such as proprietary knowledge, trade secrets, and brand names, services including R&D and management functions, and even financial operations like lending or guarantee provisions.
What are the regulations that impact Transfer Pricing?
With the staggering estimated loss of $100 billion-$240 billion in tax revenues due to profit-shifting strategies, the Organization for Economic Co-operation and Development (OECD) has sprung into action with a comprehensive action plan centred on base erosion and profit shifting (BEPS) principles, coined as the 15-point action strategy, further refined as the dual-pillar framework.
Central to this initiative are Action Points 1 and 8:
- Action Point 1: This aims to ensure that digital-economy businesses are adequately taxed in the regions they generate profits, regardless of their physical presence.
- Action Point 8: This focuses on curbing the relocation of intangible assets within affiliated companies, addressing the complexities involved in valuing these assets.
Delving deeper, BEPS 2.0 features two pillars, with Pillar 1 being pivotal for transfer pricing. It mandates that sizable MNEs allocate a segment of their income to countries where they operate and generate revenues, ensuring they contribute tax accordingly.
While the OECD has rolled out guidelines shaping transfer pricing directives globally, each country might interpret and apply them uniquely. The emergence of digital service taxes (DSTs) by various nations has raised eyebrows due to the potential for complications like double taxation. Yet, the inception of Pillar 1 hints at a phasing out of DSTs over time. A commendable 135 nations have already embraced the dual-pillar strategy.
Why is Transfer Pricing Critical?
- Regulatory Compliance: Various countries have introduced stringent regulations to ensure that transfer pricing practices are at arm’s length – meaning they are consistent with transactions between independent entities. Non-compliance can lead to hefty penalties.
- Optimising Tax Liabilities: Efficient transfer pricing strategies can help companies optimise their global tax liabilities, thereby making a significant difference to the bottom line.
- Risk Management: Proactive management of transfer pricing policies reduces the risk of double taxation and helps businesses avoid contentious tax disputes.
What Transfer Pricing services do Kreston Global offer?
Expertise tailored to your needs: As a top 15 global accounting network, Kreston Global combines local expertise with international reach. We understand the nuances of transfer pricing regulations across different jurisdictions and can guide you in aligning your strategies with global best practices.
Comprehensive Service Offering:
- Transfer Pricing methodologies: Develop and/or optimise your transfer pricing methodologies with our planning expertise and benchmarking solutions.
- Documentation and compliance: Assist with transfer pricing documentation to ensure compliance with country-specific regulations.
- Analysis and modelling: Perform analysis and modelling of intercompany services charges, giving you deeper insights into transactional patterns.
- Benchmarking searches: Our specialists conduct benchmarking searches for royalty and license agreements, intercompany interest rates, and comparable company samples, ensuring your pricing remains competitive and compliant.
- Intellectual property valuations: We are adept at performing valuations of intellectual property and evaluations of migration strategies, ensuring your intellectual assets are accurately priced and protected.
Innovative Tools & Technologies: Utilising cutting-edge technologies, we offer efficient, scalable solutions for all your transfer pricing needs. From real-time analytics to scenario modelling, we provide insights that drive strategic decisions.
Why choose Kreston Global?
With a global network of experts and a client-first approach, Kreston Global can help your business to navigate transfer pricing obligations. Let us help you turn challenges into opportunities, ensuring compliance, optimising tax liabilities, and driving growth in the global market.
Contact us today to discuss how we can identify your transfer pricing obligations and support your global business strategy.
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Further reading
Germany’s new transfer pricing rules
In January 2025, Germany’s transfer pricing (TP) rules will impose stricter documentation requirements, with shorter deadlines and enhanced penalties for non-compliance.
Mexican tax law and transfer pricing
Mexican tax law and transfer pricing regulations have recently been updated for multinational groups making administrative payments.
