Transfer Pricing

Transfer Pricing Services

Are you looking for support in dealing and complying with transfer-pricing regulations?
  • You are worrying about how to strictly comply with the complex transfer-pricing regulations while lacking professional knowledge and resources?
  • You are concerning which pricing strategy is the best?
  • Your organization is about to go through a tax inspection and you want a pre-check to advise you?
  • You are looking for defense and dispute resolution for transfer-pricing controversies with local tax authorities?

Please feel free to contact us for professional advice and solutions.

 

Let’s find more understanding of transfer-pricing with questions and answers hereunder (Click “+” to expand and read the answers):

What is transfer pricing?

Transfer price is the price at which transactions are carried out between companies part of the same group (i.e. related companies or related parties).

According to this widely used OECD definition, enterprises are related if:

(a) an enterprise participates directly or indirectly in the management, control or capital of another enterprise.

(b) the same persons participate directly or indirectly in the management, control or capital of two enterprises.

The transactions carried out between related companies must comply with the arm’s length principle, which is at the heart of any transfer pricing analysis. This means that the prices applied in transactions between companies from the same group must be the same as the prices charged by independent companies in comparable economic conditions. Otherwise, profits will not be correctly reflected in the jurisdiction of each related company involved in the transaction.

Transfer pricing is a system of laws and practices used by countries to ensure that goods, services, intellectual property and resources transferred or shared between affiliated companies are appropriately priced based on market conditions. This is important as transfer pricing may inflate profits in low tax jurisdictions and decrease profits in high tax countries – the so-called “base erosion and profit shifting” concept.

Transfer pricing and… "arm’s length"?

To tackle the issues that arise in the transfer pricing area, the OECD has issued guidelines that contain recommendations for multinational companies and tax authorities; OECD international guidelines are based on the arm’s length principle. What is the connection between arm’s length and the requirement that a transfer price between affiliated parties should be similar to the market price for similar transactions?

There’s a simple explanation – when two people are close (affiliates) they tend to hug each other. The TP theory states that these two individuals should act as if they did not know each other (independents) and during a transaction just shake hands and keep each other…at arm’s length

What Is The Goal Of Transfer Pricing Rules?
There are large differences in tax rates between countries. If left unchecked, the practice could lead to the shifting of profits from high-tax countries to low(er)-tax countries, as shown in the example.
Even though less likely, it can also be the case that the pricing policy leads to multinationals reporting too much taxes in high-tax countries and too little in low-tax countries.
The main goal of transfer pricing regulation is to prevent both situations and ensure that profits are taxed at the place where value is created.
What Actions Can Tax Authorities Take?
What can happen when the terms and conditions of a particular controlled transaction do not satisfy the arm’s length principle? In such a case, tax authorities can adjust the profit(s) of the associated enterprise(s) involved in the transaction. Besides, penalties may be imposed basing on the evidence of infringement if any.
Should Transfer Pricing Regulations be focused?

Recently, there has been a wide international focus on transfer-pricing practices. Various international developments, such as political pressure at the level of G20/G8 and OECD, make that transfer pricing guidelines are becoming more strict and complex. To understand this development better, read our article what is BEPS.

Governments consider unrealistic profit shifting a major problem and have taken it head-on. If you don’t follow the rules you take a substantial risk. And it is important to note that the rules apply even if you’re not trying to avoid taxes.

Transfer pricing disputes between taxpayers and tax authorities generally cover multiple financial years and can therefore substantially affect the financial position of a company.

An example is the ‘deal’ that pharma giant AstraZeneca concluded with the UK tax authorities (HRMC) and the IRD. This considered a transfer pricing dispute covering 13 years. Eventually, AstraZeneca paid an amount of USD 1.1bn to settle the dispute (more on Reuters).

Not all enterprises have such big exposures. But for small and medium enterprises doing business internationally, a transfer pricing dispute can become quite costly as well!

 
What Are The Requirements For Your Firm?

Transfer pricing rules around the globe are quite similar. At the same time, there are different focus areas in specific countries. Generally speaking, pricing regulations impose a number of obligations on your firm if it has controlled transactions (sometimes revenue thresholds apply):

1. Your firm should be able to prove that the terms and conditions of internal transactions are comparable to those which would have been agreed in the free market when concluding comparable transactions (referred to as “arm’s length”).

2. Your firm should keep documentation on record which shows:

  • How the transfer pricing has been established and
  • Whether the transfer pricing is in line with the arm’s length principle.

3. Your firm should file annual (corporate) tax returns based on arm’s length terms and conditions of controlled transactions.

The obligations may seem straight forward. But in practice, taxpayers often spend a lot of time and effort in making sure these are met. For example, a transfer pricing analysis which aims to meet the second obligation mentioned above can span more than 100 pages!

How Can Your Firm Meet The transfer-pricing Requirements?

You first have to ask yourself the question: What are we doing now?

As a first step, it is good to look at what internal transactions your firm has and which associated enterprises are involved. This does not only include the “visible transactions” such as supply of goods and provision of services. It also includes “invisible transactions” such as group guarantees provided to external banks.

As a next step, you would need to verify whether the terms and conditions of internal transactions are in accordance with the arm’s length principle and whether this can be substantiated.

In a lot of cases, the conditions of internal transactions are equally applied to external comparable transactions (example: a firm sells a product at the same price to both associated entities and third parties). That is in itself a sound basis to take the position that the transfer pricing is at arm’s length.

The last step would be to determine whether transfer pricing documentation needs to be prepared. This depends on steps 1 and 2, but also on local legislation. For example, in Vietnam, a company is exempted from preparing transfer pricing documentation if the revenue is below VND 50bn (approx. USD 2.2m) and when transactions with related parties are below VND 30bn (approx. USD 1.3m).

What are Transfer pricing methods?
Transfer pricing methods are analytical tools designed to determine the arm’s length nature of transfer prices for transactions between related parties. Multinational companies use these methods as a tax planning tool. Tax authorities use these methods to test the market value of transactions between related parties to determine the "real profits", i.e. profits that would have been obtained if the two parties were not related.
What Is BEPS?

There are two ways the word BEPS is used. The first is the literal way:

1. What Is BEPS – Literal meaning

  • BEPS is an abbreviation of four words. BEPS stands for: Base Erosion and Profit Shifting. This, in turn, refers to two common practices for multinationals to lower the taxes that they pay (notably: corporate taxes).
  • “Base erosion” refers to the practice of reducing the taxable base. An example is deducting large interest payments to lower the taxable profits.
  • “Profit shifting” refers to the practice of shifting taxable profits from high-tax countries to low-tax countries. An example is the transfer of ownership of intellectual property and its income from the US (high-tax) to Bermuda (low-tax).
  • International organizations like the OECD have labeled Base Erosion and Profit Shifting as a major issue. This leads us to the other way in which the word “BEPS” is often used.

2. What Is BEPS? Conceptual meaning

  • Do you remember when the news told us that Starbucks, Google, Yahoo and Amazon paid very little corporate income tax in the UK? Well, this triggered more than a public outcry.
  • It motivated a lot of busy bees at international organizations to “do something” about Base Erosion and Profit Shifting. The goal in mind is to have multinationals pay their “fair share” of taxes.
  • Since then, various noteworthy initiatives have been launched:

- The first one was the publication of an initial report on BEPS by the OECD on 12 February 2013. This report detailed the magnitude of base erosion and profit shifting and global developments in the field of corporate tax.
- This was followed by an extensive “Action Plan on BEPS,” published by the OECD on 19 July 2013. This plan provided 15 action points to tackle “weaknesses” in the existing international taxation principles. The plan was endorsed by the Finance Ministers of the G20.
- On 16 September 2014, the OECD published the first “deliverables” of the Action Plan. This was the first set of recommendations addressing the first 7 action points in the BEPS action plan.
Following the initiatives of the G20 and OECD, the UN has also taken action on BEPS by creating the UN Subcommittee on BEPS. Its main purpose is to include the views and input of developing countries into the Action Plan.
- On 28 January 2016, the European Commission issued its proposal for a Council Directive dealing with tax avoidance practices within the EU. The so-called Anti-BEPS Directive, is based on the recommendations of the OECD.
- In addition, there is an ongoing stream of recommendations and deliverables to tackle the various Action Points.

To summarize: a number of initiatives have been started to prevent Base Erosion and Profit Shifting. Based on these initiatives and their output, a number of new policies have been created. These policies are now being implemented worldwide.

In the realm of tax advisors, these developments are collectively referred to as… BEPS!

This is why you can see articles like “the impact of BEPS on jobs” or “Practical business implications of BEPS.”

But remind yourself that these kinds of articles explain the impact of BEPS regulation on businesses, NOT the practice of BEPS by multinationals.

What Is the Organisation for Economic Co-operation and Development (OECD)?

The Organisation for Economic Co-operation and Development (OECD) is a group of 34 member countries that discuss and develop economic and social policy. OECD members are democratic countries that support free-market economies.

The Organisation for Economic Co-operation and Development (OECD) is variously referred to as a think tank or monitoring group. Its stated goals include fostering economic development and cooperation, fighting poverty, and ensuring the environmental impact of growth and social development is always considered. Over the years, it has dealt with a range of issues, including raising the standard of living in member countries, contributing to the expansion of world trade and promoting economic stability.

The OECD was established on Dec. 14, 1960, by 18 European nations plus the United States and Canada. It has expanded over time to include members from South America and the Asia-Pacific region. It includes most of the highly developed economies.

The OECD publishes economic reports, statistical databases, analyses, and forecasts on the outlook for economic growth worldwide. Reports are variously global, regional, or national in orientation. The group analyzes and reports on the impact of social policy issues such as gender discrimination on economic growth, and makes policy recommendations designed to foster growth with sensitivity to environmental issues. The organization also seeks to eliminate bribery and other financial crime worldwide.

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations?
'The OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations' provide guidance on the application of the “arm’s length principle”, which is the international consensus on transfer pricing, i.e. on the valuation for tax purposes of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s length remuneration for their cross-border transactions with associated enterprises
 
Transfer Pricing

Why us

  • Professional Tax Experts: Our tax experts have accumulated a wide range of professional knowledge and experience in dealing with complicated tax issues, especially transfer-pricing. We are confident that clients will feel secured with our advice and solutions. In addition, with support from foreign experts, we can smoothly communicate with clients in their languages when required.
  • Local Resources: Besides, we have developed a strong base of local resources including a thorough understanding of the local business practice and environment, and strong relationship network which we believe significantly contribute to the success of tax services.
  • Deadline Commitment: We understand that having deliveries well completed as the schedule is always a crucial requirement. Therefore, we strictly monitor the progress and timely solve any issues incurred.
  • Competitive Fees: we always listen to your cost concern and will together with you keep it under control. We always try to save costs for clients as much as possible by applying technology in processing data and preparing reports….
  • International Network: In the case of cross-border transactions, we can make the most use of resources of the global network which have member firms in more than 130 countries. Our experts in member firms are always ready to support us when needed.
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Service Description

 
Description of Purposes and Deliveries of the service?
The primary purpose of the service is to support clients in dealing and complying with transfer-pricing regulations.

Our detailed services and deliveries might include:

  • Transfer-pricing documentation: Assist clients in filing and preparing transfer pricing documents, including the Local file, Master file and Country-by-country report. These documents are required by laws to submit to the local tax authorities where and when required. Without having these documents properly filed, clients will be subject to penalties and high tax risks in the future.
  • Tax Audit: Provide clients with a pre-check report which present findings, if any, to help clients select the best pricing strategy for their related-party transactions and/or consolidate their compliance before the official tax inspections.
  • Transfer pricing defence & dispute resolution: If the Vietnamese authorities are investigating your transfer pricing or general tax matters we can help with advice on your technical position, strategy for defence and by assisting you in the effective liaison with tax and government departments.
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Who are clients of the service?
Any companies who have transactions with related parties according to the definition of the Vietnamese transfer-pricing regulations.
How is the service delivered?

The service is normally delivered through the following steps:

  • Kick-off discussion: we make it clear and agreed with clients about objectives, schedules, cooperation mechanisms, audit strategy, responsibilities of each party in the audit. This step can be done through email and/or directly meetings; it is up to clients.
  • Planning (at our offices): we obtain a comprehensive understanding of clients' business and prepare the most relevant list of required documents for clients, then process the data/ information provided by clients.
  • Fieldwork (at clients’ offices): we perform the related procedures at Client’s premises and our office. Depending on where and when possible it might include: (1) obtain related information and data from the Client regarding its Group and its related parties transactions in accordance with prevailing regulations; (2) interview key personnel of the Client; (3) perform related analysis: industry analysis, functional and risk analysis, financial analysis, related party transaction analysis, economic analysis, including application of transfer pricing methodology and comparability analysis.
  • Finding Discussion: we present and explain our findings and solutions in detail with the management of clients. This step can be done through email and/or direct meetings.
  • Reporting: we prepare and send reports to clients for review and confirmation, then print & issue the final version. After issuing reports, we will support clients in answering questions from/ providing additional documents related to the transfer pricing reports to the tax authority (when required).
How long does the service take?
It depends very much on the scope of work and responses & cooperation from the client. 
In reality, we usually manage to finish the service within 5 - 6 weeks in most cases. For urgent circumstances, we may apply special processes and resources together with active cooperation from the client.

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Title Date Services
7/10/2020
Tax
7/2/2020
Accounting
6/28/2020
Transfer Pricing

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