Transfer Pricing

Transfer pricing is a term used to describe inter-company pricing arrangements relating to transactions between related business entities. Transfer pricing is the process by which related parties in different tax Jurisdictions set the price at which goods, services tangible or intangible assets are transferred between each other. These can include transfers of intellectual property, tangible goods, services, and loans or other financing transactions. Where a non-resident person carries on business with a related resident person and the course of that business is such that it produces to the resident person either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm's length.

The use of transfer pricing tax strategies has recently attracted a high level of international attention, due in part to the rapid rise of multinational trade, the opening of several significant developing economies and transfer pricing's increased impact on corporate income taxation. The organization for economic co-operations and development (OECD) issued guidelines in determining the transfer price of the products. As multinational corporations evolve into true global enterprises compliance with the differing requirements of multiple overlapping tax jurisdictions has become a complicated and expensive task.

In response to these factors, tax authorities around the world have become more aggressive in the transfer pricing arena, introducing new requirements for transfer of goods and services, stricter penalties, new documentation requirements for these specific transactions, increased information exchange, improved audit staff training and increased audit and inspection activity and specialization.

This intense scrutiny implies significant risks for the unwary and the unprepared, particularly in a complex field such as transfer pricing where each transaction must be analyzed under its own unique facts and circumstances.

Taxpayers are at liberty to choose any of the following methods to determine the transfer price:

•    The comparable uncontrolled price (CUP) method: under this method, the transfer price in uncontrolled transaction is compared with the prices in an uncontrolled transaction and accurate adjustments made to eliminate material price differences.
•    The resale price method: under this method, the transfer price of the product is compared with the resale price at which the product is sold to an independent enterprise; provided that in the application of this method, the resale price shall be reduced by the resale price margin (the price margin indicated by the reseller).
•    The cost plus method: under this method, costs are assessed using the costs incurred by the supplier of a product in a controlled transaction, with a mark-up added to make an appropriate profit in light of the functions performed, and the assets used and risks assumed by the supplier.
•    The profit split method: under this method, the profits earned in very closely interrelated controlled transactions are split among the related enterprises depending on the functions performed by each enterprise in relation to the transaction, and compared with a profit split among independent enterprises in a joint venture.
•    The transactional net margin method: under this method, the net profit margin attained by a multinational enterprise in a controlled transaction is compared to the net profit margin that would have been earned in comparable transactions by an independent enterprise.  

Documentation

Organizations with related party transactions are required to prepare and maintain a documented Transfer Pricing Policy. The documentation to be kept may include information relating to:

•    The selection of the transfer pricing method and the reasons for the selection
•    The application of the method, including the calculations made and price adjustment factors considered.
•    The global organization structure of the enterprise
•    The details of the transaction under consideration
•    The assumptions, strategies, and policies applied in selecting the method; and
•    Such other background information as may be necessary in regard to the transaction.

How we can help you

With the ever-increasing scrutiny of transfer pricing activity by tax authorities worldwide we can assist you in the development of tax-efficient structures that help increase compliance with legal requirements, prepare for rapid audit response, resolve transfer pricing disputes and decrease transfer pricing exposure in future periods.

•    Advance pricing agreements (APAs)
•    Tax controversy and dispute resolution
•    Documentation & planning
•    Value Chain Transformation™ / Global structure alignment

•    Our network consists of more than 100 partners and 1,600 dedicated transfer-pricing professionals based in over 70 countries. Our combined experience across our member firms enables us to develop innovative approaches for an expansive list of clients, from high growth entrepreneurs to established market leaders, in a wide range of industries.
•    Good advice is "prepare elaborate Transfer Pricing Policy guidelines in line with the Transfer Pricing Rules". Lack of a transfer pricing policy exposes the organization to a probable early tax audit visit by the Kenya Revenue Authority. Avoid it if you can.