If you have a company that operates internationally, you are likely familiar with the concept of transfer pricing. With multinational companies working in countries with different tax laws and rates, transfer pricing is used to determine proper allocation of income within the supply chain for tax purposes, matching income with functions, risks and exploitation of intangible property. Simply put, it’s a strategy that gets the right income in the right place, so you can be taxed on it correctly.
Today it is common to find intense scrutiny of transfer pricing practices worldwide, putting even well-intentioned companies under the microscope, facing compliance audits and hefty penalties for errors. Furthermore, as federal governments compete for limited tax dollars, transfer pricing becomes an easy area for disputes and audits, because of its complexity.
To better manage the intricacies around transfer pricing and avoid some of the common pitfalls, consider the following three tips.
- Create thorough documentation. Prepare annual transfer pricing documentation where appropriate, and prepare intercompany agreements to cover all material (especially recurring) intercompany transactions. This way, there is no question about what policies are in force. Also, be sure to regularly invoice for intercompany transactions, with clear descriptions on the invoices.
- Regularly assess your policy. It’s not enough to create a solid plan the first time around. You need to assess your transfer pricing documentation annually, and compare it to requirements in each jurisdiction where your business operates. An easy way to simplify agreements globally is to have one policy, with modifications made as needed to meet specific local requirements.
- Always be audit ready. Assume the worst and take a cue from the Boy Scouts - always be prepared. When an audit comes about, the timeframe allowed for response is often slim. Have the appropriate documentation at the ready, as well as an experienced advisor on call to assist with a comprehensive defense. The less time auditors have to spend getting clear answers, the less they will expect to recover as a result of their efforts.
Learn more by taking a look at the OECD's risk indicators for transfer pricing.