How can transfer pricing improve your intercompany transactions?

1 What is transfer pricing?

Transfer pricing is the process of setting the prices of goods or services exchanged between related parties within a group. Transfer pricing affects how much revenue, cost, profit, and tax each entity reports in its financial statements. Transfer pricing also determines how much tax the group pays in each jurisdiction where it operates. Transfer pricing is not only a legal requirement, but also a strategic tool to optimize your intercompany transactions.

2 Why is transfer pricing important?

Transfer pricing is important for several reasons. First, it helps you comply with the tax laws and regulations of each country where you do business. Different countries have different rules and methods for determining the arm's length price, which is the price that independent parties would agree on for a similar transaction. If you do not follow these rules, you may face penalties, audits, or adjustments from the tax authorities. Second, it helps you allocate your resources and costs efficiently within your group. By using transfer pricing, you can align your intercompany transactions with your business goals, such as maximizing profits, reducing taxes, or supporting growth. Third, it helps you avoid double taxation or double non-taxation. Double taxation occurs when the same income is taxed twice by different countries. Double non-taxation occurs when the same income is not taxed by any country. By using transfer pricing, you can avoid these situations and ensure that your group pays a fair amount of tax in each jurisdiction.

3 How can transfer pricing improve your intercompany transactions?

Transfer pricing can offer several advantages to your intercompany transactions. For instance, you can reduce your overall tax burden by charging higher prices for goods or services sold by your subsidiary in a low-tax country to your subsidiary in a high-tax country. Additionally, you can support expansion or diversification plans by charging lower prices for goods or services sold by your subsidiary in a new or emerging market. Moreover, you can manage cash flow and liquidity by adjusting the terms and conditions of intercompany loans or advances, such as charging higher interest rates or shorter repayment periods for loans or advances given by your subsidiary in a cash-rich country. All these measures help to increase profitability while reducing taxes and improving liquidity.

4 What are the challenges of transfer pricing?

Transfer pricing is not without challenges. You must comply with the transfer pricing rules and documentation requirements of each country, which may vary widely and change frequently, and prepare and maintain transfer pricing policies, agreements, reports, and audits to support your practices. Additionally, you must balance the interests and objectives of different stakeholders within your group who may have conflicting expectations and incentives. Furthermore, you must deal with the uncertainty and complexity of market conditions and the business environment, as well as the volatility and unpredictability of exchange rates and inflation rates which can affect the value of intercompany transactions.

5 How can you implement transfer pricing effectively?

Transfer pricing is a key aspect of financial management that can improve your intercompany transactions. To make sure that you are implementing it effectively, you need to have a clear and coherent strategy that aligns with your business strategy and reflects your economic reality. Additionally, you should have a robust and reliable system that includes tools, data, resources, and controls to calculate, monitor, and report your transfer prices. Furthermore, you should have a proactive and collaborative approach that involves and communicates with internal and external stakeholders. By following these best practices of transfer pricing, you can optimize your financial performance, tax obligations, and compliance risks while achieving your business goals.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?