What business typically requires this service?
Typically, it is Multinational companies that have to prepare Transfer Pricing documentation by law and therefore need to carry out Transfer Pricing analysis and prepare documentation. However, in practice any public or private company with international operations may require Transfer Pricing services, for example if a company has foreign manufacturing subsidiary, or distributor in another country, or has employees working in several countries.
Companies can use Transfer Pricing services to:
- define international Transfer Pricing policies
- set appropriate prices and rates in related-party contracts
- define proper commercial terms, allocate legal and commercial risks in related-party deals
- allocate revenues, expenses or margins among group entities according to their value-adding involvement
- defend appropriate pricing levels to tax authorities
- prevent inadvertent tax disputes and claims
In which situations is this service relevant?
Transfer Pricing services are typically needed to define contractual prices in a cross-border context, for both tangible and intangible goods and services. For example:
- sale of products or services via a related trading entity or distributor
- purchase of goods or services through a related procurement company
- production of goods by a related manufacturing facility
- research and development carried out by a subsidiary or branch in one location for an entity in another location
- royalties and licensing fees paid for Intellectual Property rights or software by companies in the same group
- different administrative, marketing, management, consulting and other services provided or shared within a corporate group
- complex joint venture setups with cost sharing or profits sharing arrangement
Some countries set out specific thresholds for transactions or turnover volume, when Transfer Pricing documentation becomes obligatory. Even if your business does not exceed such thresholds, it is advisable to meet certain minimal Transfer Pricing standards and perform basic TP analysis to prepare your business for growth and be compliant in all jurisdictions your business operates in.
What does the service include?
In a nutshell, a Transfer Pricing service analyses how functions, assets and risks are allocated between entities - parents, subsidiaries, head offices and branches - within corporate groups, in order to understand which entity in which jurisdiction deserves what portion of the international profits. This is known as functional analysis.
Transfer Pricing services also consider how goods and services sold between related parties compare to similar goods and services sold between independent parties under similar terms and market conditions. This is known as benchmarking study.
Results of the Transfer Pricing services are used in determining prices and margins that should be contractually arranged between related companies. Results and collected evidences of comparable transactions are recorded in Transfer Pricing documentation, known as Master file and Domestic files.