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:
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:
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.