As organizations continue to expand international borders, they do face challenges in meeting country-specific compliance and documentation requirements in transfer pricing. On its part, transfer pricing (or the price charged for the same products in different countries) compliance can be a time-consuming and resource-intensive process.

While multinational companies including Amazon, Google, and Starbucks, have exploited transfer pricing regulations to save their tax, there have been many instances of these companies being fined or penalized for non-compliance. As business enterprises continue to outsource their work to international partners or subsidiaries, their founders must look at the correct pricing strategy and documentation of intercompany transactions to comply with transfer pricing requirements in various countries.

How do company founders go about developing a consistent compliance policy for transfer pricing (or TP)? Let’s discuss.

What is Transfer Pricing (TP)?

Simply put, transfer pricing is the practice of the charged price for any goods (or services) that are exchanged within the same organization (or intercompany). The scope of TP is restricted to transactions occurring among company subsidiaries, affiliates, or enterprises working within the same parent company.

Transfer pricing strategies have been recently regarded as the means to “manipulate” prices across countries, mostly for reducing the tax burden. For this reason, TP has attracted strict compliance laws across the globe.

Practically, every company implementing TP needs to constantly review their TP strategies and documentation to see if they comply with new rules and regulations. Next, let us see how companies can reduce their risks in adhering to TP compliance, and how they can improve their TP compliance strategy.

4 Tips to Reduce Risks in TP Compliance

Even though TP compliance rules can vary among countries, here are 4 tips that companies can follow to avoid common pitfalls and reduce risks:

1. Familiarize the company with all TP laws in every country of operation

To avoid any pitfalls, your company must be familiar with the transfer policy laws in every country where your business is operating. For instance, as part of its TP regulations, Brazil is seeking the development of safe harbors that simplifies compliance for selected transactions.

Similarly, for the development of a new or emerging product, companies must be familiar with which entity (parent or subsidiary) carries the risk of developing the product in a particular country.

2. Adopt the “Arm’s length” principle

Accepting internationally as the de-facto principle of transfer pricing, the Arm’s Length principle simply states that, “the agreed price in any transaction between related parties must be the same as the agreed price in a comparable transaction between two unrelated parties.” This means that any company must price its transaction at the prevailing market rate, similar to how two company entities (under independent ownership) would agree to a transactional price.

Besides that, every country has its own calculation rules, when applying the Arm’s Length Principle. For instance, determine the transfer price after considering market factors like product volume, geography, and other local factors that could impact the price.

3. Document the TP policy

Proper documentation is an essential part of any company’s TP strategy and must include multiple countries. Region or country-specific documentation can be effective when multiple companies (or entities) are performing the same functions.

Intercompany agreements are also necessary to cover all intercompany transactions, which should also include regular invoicing with a clear description. Additionally, design your TP documentation policy based on every country’s requirement and potential risk from any TP adjustments.

4. Avoid any auditing pitfalls

When it comes to company audits, be prepared for the “worst” by having all the TP-related documentation ready on time (even if it means over 5-year-old transactions). The lesser time that the auditors spend on performing your audits, the better it is for your company to avoid any pitfalls.

To be audit-ready, partner with an experienced auditing service provider who can understand your business and present the best auditing strategy.

Next, let us look at how company founders can go about improving their transfer pricing compliance processes.

How to Improve TP Compliance

Typically, companies follow a different TP strategy or policy for various segments of their business. Prices are often set according to the previous year’s budgets or based on the future demand for products (or services).

Founders can improve their TP compliance by adopting an end-to-end policy for their business processes, which revolves around the following:
* Setting the right prices
* Monitoring the business profits
* Adjusting prices for different market segments or products
* Developing a process reporting system for internal transactions

Organizations can improve their TP documentation process from simply being “compliance-focused” to creating business value. This transformational process should typically include:

1. Look at the various areas of improvement in their TP compliance and documentation process, including a review of the risk levels for each jurisdiction, entity, and resource.
2. Adopt an efficient approach towards localized information, along with a balance between overall consistency and localization to make the business more audit-ready.
3. Add the element of organizational visibility and transparency to your global governance, along with the use of data analytics to extract valuable insights from compliance-related changes.
4. Grow their TP compliance documentation for future opportunities that can deliver on company policies and strategies on a global scale.

Conclusion

For multinational companies, implementing an efficient TP policy can be challenging in the face of constantly changing compliance regulations across various industries.

At Pierian Services, our team of experienced TP professionals can enable you to understand country-specific compliance requirements and devise the best strategy for reducing your tax burdens. Our compliance & taxation services are designed to turn business obligations into an advantage.

Want to know how? Get started by connecting with us today.