Adopting transfer pricing for the first time? Top 5 secrets revealed

CA Akshay KenkreCA Akshay Kenkre    20 April 2022
Adopting transfer pricing for the first time? Top 5 secrets revealed

Transfer Pricing regulation is a part of Income-tax legislation and generally applies to multinationals. If you are undertaking business in more than one country, then this article is extremely relevant to you. You may be undertaking global business for a long time, and you may like to ask, why all of a sudden transfer pricing regulation has gained so much importance. The biggest reason is UAE's commitment to adopting Income-taxes, which would impact the way how multinationals do business within the group and in UAE/GCC. Transfer Pricing is the single largest tax anti-avoidance measure that has the potential to rip off a multinational's profitability and divert a multinational's focus to long drawn litigations.

In simplistic terms, Transfer Pricing refers to intra-group pricing adopted with respect to the transactions within a multinational group.It is during the course of such intra-group transactions where the highest possibility of mischief arises since, in order to reduce their overall tax burden, multinational groups ('MNEs') often try to shift profits from one tax jurisdiction to another ,thereby do not align their transfer pricing outcomes to actual value creation.

This led to the birth of the Organization of Economic Cooperation and Development ('OECD') Transfer Pricing Guidelines with the sole objective of keeping the actions of such MNEs under check. The fundamental principles laid down in these guidelines were adopted by most of the nations after making relevant tweaks in order to suit their domestic tax legislation.Over a period of time, the businesses kept evolving and therefore the work on the legislation front also kept evolving, examples being multiple versions of OECD Guidelines, the OECD/G20 BEPS project, Separate guidelines for financial transactions, ongoing work on OECD Pillar 1 and 2 together with constant amendments in the domestic tax legislation of countries.The constant tussle between the MNEs and the tax authorities still continues where the tax authorities allege MNEs of not paying their fair share of taxes in their jurisdiction which aligns with their activities.

We reveal the top 5 secrets that you should be aware of while adopting transfer pricing for the first time:

1. Make friendship with transfer pricing

'Transfer Pricing' is an art and science of determining the value of transactions that take place between entities of the same multi-national group. This means now you have a tool to determine how you can price your transactions within the group entities. Having a set of guidelines is always better than not having any. Accordingly, use the four corners of the law to build flexibility and processes within your organisation.

Transfer pricing principles are generally business principles and deal with how to undertake a business internally while adopting market policies. This gives ample levels of clarity and results in the right allocation of profitability to the value chain. So make transfer pricing your friend while doing business.

2. Plan your transfer pricing and taxes

As transfer pricing is considered a deterrent against tax avoidance, you can adopt a successful transfer pricing only when you plan on how you would like to adopt your prices. You might be dealing with your internal pricing in a certain way as of today, which may need a re-look and possibly a re-alignment with the principles of transfer pricing. Talk to an experienced transfer pricing professional and discuss the possibilities of structuring or re-structuring your internal group transactions by applying the fundamentals of transfer pricing. To know what type of prices and profitability are prevailing in the industry, you may want to take the help of comparative analysis and benchmarking studies. Always remember that prevention is better than cure.

3. Documentation is the key

Documentation in support of the transactions becomes absolutely essential not just from a compliance perspective but also from a litigation perspective since documentation serves as evidence and could be furnished in the event of a dispute.Every MNE Group should ideally maintain the following documentationin support of its intercompany transactions:

  • Intercompany agreement – Serves as a legal document and a starting point for any analysis since this agreement documents the roles and responsibilities of the entities/parties involved in the transaction and the transfer pricing policy amongst other aspects.
  • Minutes of the Board/emails/correspondences/communications regarding the transaction – These document the business rationale of the transaction and the thoughts of the management of the Group behind entering into a particular transaction. Such documentation proves to be very important especially during litigation proceedings.
  • Backup supportings/workings/invoices etc. – Essential to ensure that the pricing policy documented in the intercompany agreement is reflected in the workings as well. In the event of any deviations, the management of the MNE Group should maintain sufficient explanations.
  • Compliance documentation – This documentation refers to mandatory documentation that the MNE Group shall be expected to maintain to comply with the relevant Transfer Pricing Regulations (Examples could be a Local File, Master File, Country by Country Report depending upon the facts and circumstances of the case)

4. Be compliant

Every Multinational Group operating in a particular jurisdiction is expected to be aware about the compliance requirements and the law of the said land and is accordingly expected to undertake timely compliances. Always remember that ignorance of the law can never be used as an excuse for non-compliance. Not undertaking timely compliances could lead to penal actions thereby hindering the objectives of the Group i.e.,undertaking business

5. Try to be proactive

Apart from planning studies undertaken at the time of the transaction itself, an MNE Group can also consider other proactive measures which lessen/eliminate cumbersome litigation thereby enabling the MNE Group to focus on its business objectives.

Examples of such proactive measures include:

  • Real-time and contemporaneous documentation
  • Asking an expert in case of doubt
  • Use global experience, especially of countries like India
  • Safe harbour application;
  • Advance Pricing Agreement;
  • Advance rulings to seek clarity on certain positions.

In conclusion

You can viewTransfer Pricing asessential checks needed from a government perspective to effectively deploy a Corporation Tax regime in the country. It is like giving you a range to speed on the highway. With an absence of such a range, the possibility of accidents is high on such roads. In the agenda of global development, Transfer pricing acts as an incubator for global businesses to enable ease of cross border transaction within the four corners of law.

Authored by: CA Akshay Kenkre

CA Akshay Kenkre (experience 17 years) is an Indian tax advisor and a Chartered Accountant by profession who is well known for his expertise in global transfer pricing, structuring and international taxation. He is the founder and leads a transfer pricing focused firm named TransPrice. Akshay has authored multiple books on international taxation and transfer pricing, which is globally well-acclaimed. Akshay understands the technicalities involved in the subject of taxes and global transfer pricing along with the practical application of complex tax solutions to dynamic industry scenarios.

Co-authored by:CA Mit Gaglani

CA Mit Gaglani (experience 8 years) is an Indian as well as an Australian Chartered Accountant with a global and Indian experience in Transfer Pricing and structuring. He is an Associate Director with TransPrice, where he adds tremendous value to multinationals and promoter-driven companies. Mit has handled multiple complex advisories, compliance, and litigation assignments across multiple sectors.

 

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax

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