As enterprise with foreign branches and subsidiaries, you are increasingly confronted with the requirements in the field of ‘transfer pricing’ i.e. the pricing of cross border delivery of services and goods within the group. The main purpose of local tax authorities is to determine whether the intercompany transactions are agreed on at-arm’s-length conditions, meaning at the same price level and conditions as would be agreed between unrelated parties. By reviewing the pricing of your intercompany transactions, the tax authorities try to verify whether the reported taxable results in each country are reasonable and that the contracting parties are no artificially shifting profits to a favourable country.
Significant attention in the press, but also from tax authorities
During the last couple of years, large multinationals like Starbucks and Amazon received a lot of attention from the media about the tax structures that they implemented to optimise their tax position. Although these companies operate within the boundaries of the relevant tax laws, not everyone finds the outcome for the local treasury reasonable. In order to increase the tax revenue from the multinational companies, the transfer pricing rules are getting increasingly complex and detailed. For companies that operate internationally it is important, therefore, to verify whether the transfer pricing documentation and substantiation meets all requirements. It is just a matter of time that each taxpayer will be questioned by local tax authorities about the transfer prices that they apply. The question is not “if’ but rather ‘when’.
Specific situations deserve special attention
In addition to ordinary business activities and transactions, we experience that local tax authorities are eager to assess the at-arm’s-length nature of the following transactions:
- Internal reorganisations whereby certain business functions of branches of activity are shifted from one country to another or discontinuation of activities in a certain country;
- Financial arrangements within the group, certainly if loans were written-off, for instance, by intercompany creditors;
- The use and remuneration model of intellectual property such as trade names and know-how if used or transferred to other business units of the group
- Headquarter charges for services to the various business units and entities
Continuous losses trigger questions
From experience we know that a discussion with tax authorities about the intercompany pricing policy (“transfer pricing”) can start if the business activities are consistently loss making (“would an independent company also continue to absorb these losses or simply terminated these activities?”) or strong shifts in business results (“do strong fluctuations in results match with the nature of the business activities and the risk profile of the company?”)
Your answer ready in your desk drawer
Given the importance (and attention from the tax authorities during a tax audit), most companies that operate internationally decide, therefore, to substantiate their transfer-pricing model. Since providing evidence about the business like character (‘the at-arm’s-length nature’), is not an exact science, many of our clients also use an independent third party transfer-pricing database to benchmark the transfer prices applied with the outside world. These databases contain millions of other companies that are engaged in similar business transactions. For your enterprise this is a crucial check to evaluate the risk that the risk tax authorities may challenge the applied intercompany pricing and profit margin.
From strategy to documentation
We can assist you with the preparation of your transfer pricing strategy and documentation. We have extensive experience with most countries and could for instance assist you to obtain upfront approval (a ‘tax ruling’ or ‘Advance Pricing Agreement’) from the tax authorities. Furthermore, transfer pricing can also be used to lower your global effective tax rate or to utilise your existing loss capacity more effectively.
We are always willing to discuss with you the range of our services in an informal discussion.