Frequently asked questions about Transfer Pricing
How can companies defend against accusations of transfer pricing abuse?
Multinational Enterprises that routinely transfer components and commodities across borders where they are manufactured into finished goods, or who have companies within their group that collaborate across borders to provide services to customers, can negotiate with the tax authorities to come to agreement about transfer prices.
Should my company wait to be cited for transfer pricing abuse before negotiating with the tax authorities in the countries in which we operate?
As always, tax authorities are very interested in getting good information from the companies they deal with. They recognize the companies have an advantage in that they know much more about their costs than the taxing authorities, which is at the heart of transfer pricing risk for these authorities. So waiting until those authorities are already suspicious of the MNE is not advisable. Come up with a plan to create a schedule of transfer prices that are supportable and based on specific market conditions, then present it to the relevant tax authorities.
Will all of the transfer prices for my group have the same basic structure?
Not at all. One of the critical activities in creating your negotiating document, called an Transfer Pricing Ruling, is to review and apply the most appropriate rule to each activity that generates a transfer of goods over borders. Sometimes it is a form of “cost-plus,” sometimes it is something more complex that has become the accepted method of pricing.
How does having a Transfer Pricing Ruling help defend against an accusation of transfer pricing abuse?
Once the company drafts the Transfer Pricing Ruling, they negotiate with the tax authorities in all the relevant countries. Upon coming to agreement with those authorities about specific transfer prices, the document becomes the basis for a defense for any accusation of transfer pricing abuse, as long as the agreement is scrupulously observed.
It is important to note, however, that transfer pricing never stops. New business conditions, supply chains, technologies, partners – all of these and many more could impact transfer prices in an MNE. So the Transfer Pricing Ruling must be reviewed regularly to be sure it is up-to-date.
Is it a good idea to do this ourselves? We have limited experience negotiating with tax authorities. Is it better to find an advocate with more experience to help us?
It surely is. An attorney who understands cost accounting but is accustomed to negotiating with tax authorities would be a good choice, and THEVOZ Attorneys has the experience and skills to get the job done to your satisfaction.