The observation of transfer pricing regulations is essential for internationally working businesses. Transfer pricing covers the setting, analysis, documentation and adjustment of charges made between related parties located in different countries (e.g., parent company in country A and its subsidiary based in country B) for goods, services, use of (intangible) property etc. In principle, an adequate transfer price should match what a seller would charge an independent customer (so-called arm’s-length-principle).
For determining the correct transfer prices, a thorough research is imperative. It is by far not sufficient to roughly estimate transfer prices. Indeed, generally an in-depth research is required and conducted with the help of professional databases which compare a huge number of similar transactions performed by competitors. Typically, the tax authorities use similar tools.
In addition to carefully determining the correct transfer prices, a comprehensive documentation is required by law, stating how and on what grounds the respective company determined the respective transfer prices.
Frequently, medium-sized businesses violate these requirements, either because the respective national regulations are unknown to them or because the topic “transfer pricing” is at the very bottom of the to-do-list. However, if transfer prices are not determined under consideration and in compliance with the respective regulations (also taking into account possible challenging deadlines), the company may be subject to back taxes and cumbersome processes with the tax authorities. Even worse, business companies violating transfer pricing rules usually get into severe trouble not only with their local tax authorities but with the revenue services in all affected countries.
To avoid lengthy discussions with the tax authorities, enterprises should therefore focus on complying with transfer pricing regulations from the beginning. Reliable transfer pricing data should already be collected in the planning phase. Furthermore, the necessary documentation should be prepared before entering into intercompany contracts. In case of discrepancies or insecurities, the possibility of Advanced Pricing Agreements in the relevant jurisdictions should be considered and evaluated.
Transfer pricing is a complex topic. That is why its relevance should not be underestimated. In over 50%(!) of all transfer pricing disputes, the tax authorities consider transfer prices to be inadequate. The result is that in these cases the transfer prices are adjusted in one or more countries leading to an immense tax burden of the affected party/parties. This risk may be significantly reduced by complying with the rules from the beginning – a correct and comprehensive transfer pricing documentation is decisive!
Transfer pricing can also be a great chance for internationally working businesses. Navigating through the different transfer pricing regulations, companies can actively influence their consolidated/international tax rate. Especially profit allocation and Double Tax Treaties play a decisive role in this respect.
Our transfer pricing specialists are Attorney Uwe Müller and Attorney and Tax Advisor Lars-Olaf Leskovar. Together with our international cooperating partners, they help you minimize tax risks and take opportunities within the overall tax rate. If you want to discuss your case with us, please do not hesitate to contact us by e-mail (firstname.lastname@example.org) or by phone (+49 (0)69 76 75 77 80). We will promptly arrange an appointment for you in order to talk about your transfer pricing needs in more detail.