Transfer pricing is one of most important issues facing businesses today, and it relates to the pricing of transactions between connected parties. Take for example, if I was to provide tax services to a member of my family I might provide those services at a different price than to an arm's-length customer. Now transfer pricing seeks to impose the same price on a connected party or control transactions as to those arm’s-length transactions, and that's the same principle for an individual or companies.
Transfer pricing is really important for business for two main reasons. The first is tax compliance. Transfer pricing is a way of manipulating prices between different countries either on purpose or inadvertently and for that reason there are strict compliance rules around the world. If companies don't comply then there are serious penalties and implications, so compliance is really important for business.
Secondly transfer pricing is a way of managing tax costs. It’s possible to look at different tax rates in different countries and use transfer pricing as a non-aggressive legitimate tax planning tool, so for those two reasons it’s important for many large businesses.
The new compliance rules are being introduced around the world and this is in reaction to media pressure and political and public concern about transfer pricing and international tax avoidance. The new rules are being introduced from 2016 and they relate, in practice, to documentation and evidence that companies are complying with transfer pricing principles in whichever countries they operate.
In practical terms these new compliance rules mean that businesses need to review their current documentation and their current transfer pricing strategy. They need to look to see if the new rules will impact them and how they need to draw up the new documentation, because existing documentation for almost all businesses will not be sufficient to comply with the new rules. Virtually every business will need to draw up new documentation.
What companies need to do now is review their strategies and their documentation and see how the new rules will affect them. They will almost certainly need to review and change their documentation, but it's not all bad news. There are still opportunities to manage tax costs as long as the new rules in the new environment are adhered to.
Download a copy of the transfer pricing help sheet.