International Transfer Pricing: Is the Tax Man about to Knock on Your Door?
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INTERNATIONAL TRANSFER PRICING: IS THE TAX MAN ABOUT TO KNOCK ON YOUR DOOR?
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Transcript of International Transfer Pricing: Is the Tax Man about to Knock on Your Door?
INTERNATIONAL TRANSFER PRICING: IS THE TAX MAN ABOUT
TO KNOCK ON YOUR DOOR?
WHAT IS TRANSFER PRICING?KEY DEFINITIONS
Transfer pricing — price at which an enterprise transfers (sells) physical goods, intangible property, and provides services to an associated enterprise (related party).
Associated enterprises — one of the enterprises participates directly or indirectlyin the management, control or capital of the other (e.g., parent/sub) or the same enterprises (brother sister companies).
Arm’s length principle — associated enterprises must charge the same price, royalties or other fees in relation to a controlled transaction as would be charged by independent enterprises in an uncontrolled transaction under comparable circumstances.
FAR analysis — the base of comparabilityin the arm’s length principle.
FAR
Functions, Assets and Risks
PREFER TO LISTEN TO OUR WEBINAR ON INTERNATIONAL
TRANSFER PRICING?CLICK HERE.
TRANSFER PRICING METHODOLOGY FOR PRICE DETERMINATION
There are several methodologies used to determine the correct transfer price. The most commonly used are …
CUP(Comparable Uncontrolled Price) —considered the most reliable indicator of an arm's length price. Uses a third party price for identical goods, services or property under comparable conditions to determine the correct transfer price.
CP
(Comparable Profit) — Used in situations of transfers of intangible goods. Profits made in a transaction are compared to profits made in similar transactions between unrelated companies to determine whether an adjustment is necessary.
The resale price method compares the profits of a transaction where an entity re-sells goods to a related party, to the profits of a comparable transaction between unrelated entities.
RESALE
The cost plus method evaluates whether the amount charged in a controlled transaction is arm's length by reference to the gross profit markup realized in comparable uncontrolled transactions.
COST PLUS
All Invoicing and collections are made in the local country. Revenue is subject to tax locally, minus deductions for fees paid to associated entity.
DIRECT REVENUE
TRANSFER PRICING QUESTIONS TO ASK YOURSELF
What countries are involved?
What will be the parent company of the newly established entity?
What activities will be performed in country?
Who will be employed or provide services for the newly established entity?
What contracts will exist with the newly established entity?
How will the newly formed entity be financed?
TRANSFER PRICING QUESTIONS TO ASK YOUR PREPARER
What markup do you use?
What is my audit / assessment risk?
When do I review my transfer pricing policy, ISA, TP study and
benchmarking?
Avoiding Double Taxation
For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute on the determination of the arm’s length remuneration on cross-border transactions.
Two common ways to do this are …
MAP
(Mutual Agreement Procedure)
Where a company considers they are being incorrectly taxed they can request the application of the Mutual Agreement Procedure from the country they are resident in.
MAP
The 'competent authorities' of those states involved will endeavor to resolve any tax disputes and often eliminate any double taxation arising from transfer pricing adjustments.
MAP
APA
(Advance Pricing Agreement)
An APA is a written agreement between a business and the relevant tax authorities which determines a method for resolving transfer pricing issues in advance of a return being made.
APA
When the terms of the agreement are complied with, it provides assurance to the business that the treatment of those transfer pricing issues will be accepted by the tax authorities for the period covered by the agreement.
APA
Keep documentation current, as some countries implement strict rules on
how regularly documentation needs to be updated.
Not doing so can be costly.
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