Transfer Pricing – Top 10 Tips

Base erosion and profit shifting have recently made news headlines around the world. As such, transfer pricing is an area where all tax authorities continue to focus their resources. The consequences of a transfer pricing reassessment can create some sleepless nights for owner managers, CFOs and controllers everywhere. Here are the Top 10 Tips for transfer pricing today:

1. Recognize there may be new risk in different places.

• Market volatility can radically change the risk profile of a business. Increasing debt, supplier issues and problems with key customers are all signs that a business risk profile may have shifted and that intra-group pricing arrangements may need to be reviewed.

2. Beware the impact of currency movements.

• Actual currency results may be substantially different to those anticipated when the transfer pricing policy was set up. Consider the impact of currency movements on your profits before year-end to help identify whether adjustments should be made.

3. Update intercompany debt pricing.

• Debt prices will carry a particularly high risk of challenge in situations where a single flat rate is being applied across different entities, where rates have not been regularly tracked and updated or where losses have eroded the equity base.

4. Scrutinize new country operations.

• Companies that have opened operations in new territories should review arrangements to ensure the pricing is appropriate. Current transfer pricing hot spots include Italy, Spain, China, India and Brazil.

5. Look for the big items.

• Major one-off events such as stock option exercises, winning a large customer contract, closures or mergers and acquisitions are all transfer pricing red flags. Adjustments and updates to your pricing arrangements may be necessary in order to recognize the impact of events that alter the cost base, revenue streams or risk profile of the business.

6. Keep an eye on cost reduction exercises.

• The more effective your cost reduction exercises are, the more likely the need for an adjustment and price change. Also, consider which entities should be awarded any resulting savings.

7. Match people moves with pricing moves.

• When roles or functions are moved to different entities, there are often pricing consequences. Moves that involve strategic management, marketing, sales or R&D roles or functions frequently trigger the need for pricing adjustments. The more important the roles or functions are in the business' overall value generation, the greater the risk of audit and potential adjustments.

8. Follow the money.

• Keep track of significant investments such as those in marketing, new products or brand building and most importantly, which part of the business bears the cost. When they begin to create value, appropriate pricing arrangements will need to be in place.

9. Recognize intangible assets.

• Intangibles - which include patents and trademarks as well as unpatented technology, know how, brands and customer contracts - are often powerful, invisible drivers of profit so it's important to identify them and ensure they are being transfer priced appropriately.

10. Plan to minimize adjustments.

• With increased market volatility, transfer pricing adjustments are more common and often more substantial than in the past. Where possible, adjustments should be posted before year-end so they are reflected in management and local statutory accounts. Post year-end adjustments can be problematic and costly due to differences in tax authority approaches and can result in having to pay tax on the same profit in more than one jurisdiction as well as giving rise to indirect tax and duty issues.