If you can avoid a transfer pricing dispute by conducting a transfer pricing review, it is money well spent. A transfer pricing specialist also knows where to look. Do you know the risks? A fresh pair of eyes may spot gradually evolved issues that have not been detected by those working with transfer prices on a daily basis. However, much depends on the degree of transfer pricing risk and the willingness of the company’s leadership to assume such risk. A quick and dirty-approach to yearly transfer pricing compliance may keep the effort at a reasonable level, but prove to be worthless if a transfer pricing controversy arises. Transfer pricing compliance requires finding a balance between reasonable effort (cost) and adequate/acceptable contents. Tip 5: Let a specialist review your transfer pricing Companies should monitor the levels of trade receivables from intra-group sales, and consider charging interest on late payments. If interest on late payments is charged to third-party clients, it needs to be charged to group companies as well.Įven though limited risk entities generally earn a guaranteed return, the non-charged interest income or unpaid interest expenses are not offset against the transfer pricing adjustments on products or services, since financial income and expenses are reported for accounting purposes below the operating profit level, which is relevant for product pricing purposes. The transfer pricing of financial transactions is not limited to charging arm’s length interest on intra-group lending, but also, for example, the trade receivables and accounts payable have to fulfil the arm’s length criteria. Tip 4: Charge interest on intra-group receivables However, all intangibles should be properly identified and adequately documented to avoid unnecessary and burdensome questions from the tax authorities. In most cases, for example, sharing best practices does not require separate compensation as the benefits to group companies are equal to their input for the group’s common good. they would not be disclosed to a competitor or a third party without compensation). In addition to registered intangible assets or intangibles recognized for accounting purposes, intangibles for transfer pricing purposes also include trade secrets, know-how and other intangible assets that can be controlled and have value (i.e. The definition of intangibles for transfer pricing purposes is wide. Companies should make the necessary year-end adjustments or true-ups to the transfer prices to actually reach the arm’s length results. in practice they fall within the inter-quartile ranges of the benchmark studies. This requires that the actual results of the tested group companies or their intra-group transactions are at the arm’s length levels, e.g. However, this is not enough: transfer prices should actually be at arm’s length. Huge effort is put into preparing, or at least drafting, transfer pricing documentation with an extensive explanation of the group’s business, group companies’ functions, assets and risks, as well as the terms of related party transactions. Tip 2: Check that the results fall within the inter-quartile rangeĬompanies agree to adhere to the arm’s length principle in their transfer pricing policies. Consequently, companies should regularly review the contents of their intra-group agreements and update them, if necessary, to reflect any changes that have been made to intra-group transactions. ![]() ![]() ![]() However, the written agreements fulfil their purpose only if they are up to date and complied with. Putting key terms of intra-group relationships in writing in a signed agreement is a simple way of committing the relevant group companies, but also of communicating the terms to the tax authorities, if necessary. Written intra-group agreements have become very important, since they are the basis for any transfer pricing analysis.
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