Considering the global economy and the increase in the international requirements due to the constant introduction of new regulations, transfer pricing documentation has become an important tax topic calling for specific strategies associated with the growing number of intercompany transactions.
Transfer pricing is considered a very specific topic on international level, as stated in the Corporate Laws and Regulations of most tax jurisdictions, as well as the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), and the reference established in the EU Transfer Pricing Forum.
Considerations in Tax Jurisdiction
Multinational and national companies overlook a complex environment and must consider and reorganise operational structures for internal/external operations, to ensure that the redistribution of benefits among different tax jurisdictions is carried out in accordance with the arm’s length principle.
Small and medium-sized enterprises (SME) with intercompany transactions such as the sale or purchase of goods, the provision of services, the transfer and use of intangibles or financial operations have often found themselves facing difficulties with the integration of transfer pricing in their operating model, resulting in non-compliance with global and local taxation rules.
The elaboration of local and international mandatory documentation of transfer pricing, such as the master file and local file, as well as the preparation of benchmarking studies across Europe and worldwide, are clearly prescribed by the OECD guidelines and the local requirements of each tax jurisdiction. Beside of that, to be prepared for potential administrative tax inspections, it is considered as a value added to design and properly implement transfer pricing policies applying the adequate methodology.
Principal insights for a Tax Inspection
Nowadays, the tax authorities focus on the detection of risk areas with specific characteristics such as:
- Business restructuring
- Valuation of transmission of intangibles
- Payment for intragroup services
- Current operating losses
- Economic substance of related operations
- Adequate cost bases
- Relevant amounts of management fees or any other service, without documentary support that proves the benefit of the services received
- Reliability of global benchmarking studies
- Financial transactions
- Benefit allocation rules.
Therefore, the transfer pricing policy must be much more than a piece of paper: it must be strictly implemented and taking into account that the transfer pricing documentation analyses whether the pricing is consistent with the arm’s length standard. This can only be done by looking beyond the terms of intercompany agreements and performing a rigorous functional and economic analysis, followed by:
- Identification, characterization, and documentation of operations among related parties for the determination of prices at market value, aligned with the nature of the business.
- Identification and management of all types of intangibles.
- Preparation of benchmarking studies to determine the market price by databases applied to the transfer pricing methodology.
Conclusions
In line with transfer pricing compliance, the effectiveness of global transfer pricing policies involves converting them into strategic tools for investment decisions, tax planning, as well as for the value chain analysis.
The importance of a transfer pricing policy consists in guidelines to build security and confidence in the transactions carried out among related parties. It is not just to be considered as a guideline, but as a tool to implement and maintain constant documentation that supports and validates intercompany transactions economically and legally.
When there is no adequate implementation of a transfer pricing policy, it could result in transfer pricing adjustments by the tax authorities implying penalties, interest, and tax rate differentials. Therefore, it is necessary to elaborate, maintain and comply with a robust and well defended transfer pricing policy, along with the specific documentation. Defining policies allows the organization to optimise resources and comply easily with international or national transfer pricing controls.
For more information on the ETL GLOBAL Transfer Pricing Working Group and to stay updated on their initiatives, visit their dedicated page:
