Transfer pricing

Transfer pricing has been an item on the agenda for a number of years now but has often been given a low priority.

With governments being constantly pressed to increase revenue without raising taxes, multinational companies are coming under close scrutiny. Hitting multinationals who do not have their transfer pricing in order is simply a vote winner.

Roger Moore Solutions can create and maintain transfer pricing documentation.

Transfer pricing documentation is a standard requirement in most countries for companies operating in more than one country. It is the documentation that proves to the tax authorities that transactions between 2 companies within the same concern are charged at the correct prices, and that therefore taxable earnings are not being transferred from one taxable jurisdiction to another. These transactions are called controlled transactions.

The correct prices are, of course, a matter for discussion. However, there are rules by which multinational entities must operate. The basis for pricing must be that all transactions are conducted by arms-length agreements. In other words would a company buy, or sell, at the prices that it uses for intercompany transactions, in similar transactions to companies outside of its control?

Most countries follow the OECD Transfer Pricing Guidelines which sets a framework for the documentation.

Documentation should include all of the information required in order to prove that the controlled transactions are made at arms-length.

It is impossible here to provide a full list of what is required but the following gives an idea of what should be included.

• How the companies are related to each other, including a description of the concern, the division within the concern (if applicable) and of the roles played by the companies within that structure.
• A functional analysis of the activities performed, assets employed and risks assumed by the two parties involved in the transactions.
• What transactions are involved in the transactions?
• Choice of pricing method for the controlled transactions. OECD Guidelines provide a number of acceptable methods for pricing. Dependent on the nature of the transactions, a choice of which pricing method should be made. There can be differences in which methods are allowed between countries. Most countries have clearly defined and accepted methods.
• Why were the other methods rejected?
• The data and documentation backing up all of the above should be included. If, for example, the price is cost plus a mark-up, then part of the data would be the calculation of the cost price.
• If the basis of calculation is that prices are marked up with a percentage that is normal within the industry then external benchmarking data must also be obtained.

Documentation applies to a year at a time (normally) and needs to be regularly revised.