As enterprise with foreign branches and subsidiaries, you are increasingly confronted with the requirements in the field of ‘transfer pricing’ i.e. the pricing of cross border delivery of services and goods within the group. The main purpose of local tax authorities is to determine whether the intercompany transactions are agreed on at-arm’s-length conditions, meaning at the same price level and conditions as would be agreed between unrelated parties. By reviewing the pricing of your intercompany transactions, the tax authorities try to verify whether the reported taxable results in each country are reasonable and that the contracting parties are no artificially shifting profits to a favourable country.
Much attention in the press but also from the tax authorities
In recent years, large companies such as Starbucks and Apple have often been in the news for their use of tax-saving schemes. These companies neatly adhere to the legal rules, but the outcome for the treasury is not perceived as reasonable by everyone. In an attempt to increase the tax revenue of multinationals, the tax laws and rules are changing more and more finely as a result. For internationally operating companies, it is therefore even more important to have a good overview of the transfer pricing issues. The question is not so much "if" the tax authorities will ask questions about this, but "when".
Specific situations deserve special attention
In addition to ordinary business activities and transactions, we experience that local tax authorities are eager to assess the at-arm’s-length nature of the following transactions:
- Internal reorganisations whereby certain business functions of branches of activity are shifted from one country to another or discontinuation of activities in a certain country;
- Financial arrangements within the group, certainly if loans were written-off, for instance, by intercompany creditors;
- The use and remuneration model of intellectual property such as trade names and know-how if used or transferred to other business units of the group
- Headquarter charges for services to the various business units and entities
Continuous losses raise questions
A discussion with the tax authorities on transfer pricing can also arise if there are structurally loss-making activities (would an independent company not stop long ago?) and strong profit fluctuations (do such fluctuations fit with the nature of the business of that business unit?).
Your answer ready in the desk drawer
Because of the great importance (and also the attention of the tax authorities during an audit), most internationally operating companies choose to properly record the way in which the mutual prices are calculated. Since one can argue about 'businesslikeness', many entrepreneurs also choose to compare ('benchmark') their pricing with the outside world by using a transfer pricing database. This database contains millions of companies that carry out similar transactions. This is therefore an important test for the entrepreneur to check whether the profit margin on transactions could possibly lead to discussion with the tax authorities in the future.
From strategy to documentation
We can assist you in preparing your transfer pricing strategy and documentation. We have extensive experience with most countries and can, for example, assist you in obtaining a ruling from the tax authorities. Furthermore, transfer pricing can also be used to reduce your global effective tax rate. We would be pleased to provide you with more detailed insight into our services during an informal meeting.