Transfer Pricing as a planning tool or a compliance burden

CA Akshay KenkreCA Akshay Kenkre    09 May 2022
Transfer Pricing as a planning tool or a compliance burden

Transfer pricing remains one of today’s most crucial board room topics of discussion, and if not enough given adequate attention at the right time,it may lead to taxation issues. Eventually, the taxpayers can expect a back-and-forth with tax authorities with demand for additional taxes, penalties, and negative publicity as the end-game. 

Over a period of time, the uncertainties in the world economy, aggressive measures towards unfair practices by tax authorities, and the current pandemic situation have further complicated the issue of transfer pricing, which wasn’t that simple in the first place. 

The transfer pricing document viz. planning report (containing price-setting analysis for related party transactions), transfer pricing report, forms/ certifications typically include details on:

  • organisation structure, business operations, a description of the supply chain, business models followed;
  • value drivers of profit, financing arrangements, description of functions performed, risks assumed, assets utilised;
  • restructurings within the group and rationale for the same, assumptions behind the rejig of supply chains; commercial factors considered while taking decisions regarding shifting of functions and risks, if any;
  • industry analysis, financial information; and
  • benchmarking analysis and economic adjustments.

The above information is of paramount importance to support the arm’s length pricing regarding related party transactions undertaken by the taxpayer.

Most of the jurisdictions across the globe have a mandatory requirement for the relevant[1]taxpayers, i.e. to prepare and maintain transfer pricing documentation to ensure compliance with the Transfer Pricing Regulations of the respective country.

Taxpayers more often than not commit to the grave mistake of treating this transfer pricing documentation as a mere compliance burden, assuming it is purely intended to meet regulatory requirements.

To avoid penal implications, the taxpayers, as a post-mortem exercise work on creating a transfer pricing document with minimum details, without taking cognisance of actual facts like business realities, legal structure, economic substance, initial objectives,  and thereby face the consequences and associated risks.

An ill-prepared, non-fact-driven transfer pricing document with critical information found missing can lead to severe consequences and damage the reputation of the taxpayer and its Group.

The tax authorities around the globe are well connected and do operate in a coordinated manner. With the information of the taxpayer getting shared transparently, amongst tax authorities, the implications as a fallout of insufficient transfer pricing documentation could be i) heavy penalties for misrepresenting facts/ wrong information; ii) detailed scrutiny/ litigations with revenue authorities; iii) risk of scrutiny/ assessment at multiple jurisdictions wherein the Group operates.

With the free flow of information across jurisdictions, the increasing focus of the tax authorities is on substance and the actual conduct of the parties in a related party transaction.

Conclusion:

True prevention is not waiting for bad things to happen; it's preventing things from happening in the first place - Don McPherson

The taxpayer can use transfer pricing as a planning tool and pro-actively ensures arm’s length nature of existing and proposed related party transactions by:

  • undertaking an economic/ comparable analysis,  to recommend a transfer pricing methodology for the relevant transaction – following the right approach and sequence of – first price-setting, then price testing;
  • re-validating transfer pricing positions in changing times;
  • ensuring alignment between functions, risks, and rewards/ remunerations;
  • capturing facts, changes, analysis (industry/market report) by maintaining robust documentation; and
  • timely identification of any inconsistency and detection of transfer pricing risks so as to trigger the corrective action.

In essence, the transfer pricing documentation should be robust, linked with business realities, and appropriately capture the transaction's facts and commercial substance.

The taxpayer has to ensure that the transfer pricing positions adopted and documented ( in transfer pricing documentation, intercompany agreements, including internal communications like e-mails, invoices, minutes of meetings, etc.) are in sync with the value created by each entity in the group/ based on the economic substance to demonstrate and substantiate the arm’s length nature of related party transactions.

Therefore, the need of the hour is to holistically look at tax planning strategies, value creation, pricing policies, transfer pricing documentation and align them.

[1] Taxpayers of different jurisdictions are required to maintain contemporaneous documentation based on satisfaction of certain criteria

Authored by: CA Akshay Kenkre and CA Kamlesh Kaltari

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.

CA Kamlesh Kaltari is an Indian tax advisor and a Chartered Accountant with a global and Indian experience in transfer pricing and structuring. He has extensive experience of working with multinationals and handled multiple complex advisories, compliance, valuation assignments,and litigation assignments across multiple sectors.He has handled multiple APAs (unilateral and bilateral)assignments involving clients operating in the technology space.

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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