Setting up and maintaining control over intercompany pricing is crucial for ensuring compliance and minimizing the risk of unintended tax implications. Transfer pricing should never be viewed in silo, but holistically and interconnected with other tax disciplines. Transfer pricing is the first to be impacted once any operational changes occur within an international group; on the other hand, any changes in intercompany prices may and would have an impact on other taxes. In this article, we discuss what being in control in transfer pricing means and why it is necessary. 

This article was written by Vera Zhuravleva and Gabriela Cazacu. Vera and Gabriela are part of RSM International Tax Services with a focus on transfer pricing.

Transfer pricing cycle begins with understanding business operations, having transfer pricing policies in place; continues with implementing those policies and monitoring their execution, and documenting the above in a timely manner. Nowadays many companies have transfer pricing policies in place, but lack their efficient execution, which often result in mismatches between the policies agreed and the actual financial outcome from a transaction. In addition, the dynamic nature of business operations can lead to significant changes, which could be another trigger for the need to reset the transfer pricing for specific operations. What we see in practice, however, is that companies tend to focus on a compliance aspect, i.e., they assess the mismatches and changes retrospectively, make and document adjustments, instead of (re)setting the prices proactively and fixing the intercompany price implementation process.

In general, nothing is bad about making adjustments as this means that the company is trying to align with the arm’s length outcome. On the other hand, a continuous need for adjustments can signal that the policies are not implemented or are not being monitored in the right manner, meaning the company is not in control of their transfer pricing process. Local transfer pricing regulations in many countries require that the intercompany price be ‘set’ at arm’s length, not ‘adjusted’ to be at arm’s length. Some tax authorities already question the transfer pricing governance process and review entries being made real time in companies’ administration, rather than just looking at transfer pricing documentation.  

Another important aspect that should be considered is that transfer pricing is not an isolated practice but is a part of the global tax. Transfer pricing changes and adjustments may and often will impact other taxes, e.g. VAT, customs duties, withholding tax (WHT) etc. For instance, if the price of goods (services) changes due to a transfer pricing adjustment, the relevant VAT and customs duties may need to be adjusted as well. An interaction between transfer pricing adjustments and indirect taxes is brought up as a topic in several court cases globally. (e.g., ECJ, C-726/23 ArcoMet Tower Cranes, which seeks to clarify whether a voluntary TP adjustment related to management services constitutes a taxable transaction for VAT purposes). 
There are many other examples of how the lack of transfer pricing planning and processes impact other taxes. By adopting a proactive approach, companies can align transfer pricing policies with business realities, mitigate the risk of double taxation, and effectively manage challenges from both operational and tax perspectives. Furthermore, integrating transfer pricing considerations with other tax disciplines can further enhance tax efficiency and compliance. 

Forward thinking 

Only by addressing transfer pricing holistically and in an integrated manner, a company would start being in control. In practice that could mean the following steps: 

  • Prepare and implement transfer pricing policies and business processes, including (but not limited to) proper monitoring of transfer price and processing TP adjustments proactively (rather than retrospectively). This will help to avoid double taxation and challenges from an operational and tax perspectives.
  • Align with VAT, customs, international tax, WHT specialists before implementing any proposed policies and before making any adjustments. This can help to avoid challenges with the relevant authorities or may help to get relevant refunds (in case of adjustments). 
  • Consider using profit monitoring tools to ensure that you are applying the correct data and that the transfer pricing is managed proactively. 
  • Document and report all of the above in a timely manner – this should include intercompany agreements with relevant clauses (allowing TP adjustments and in what cases), TP compliance documentation and ultimately tax returns reflecting the adjustments. 

Key take-aways

Maintaining control over transfer pricing is crucial for ensuring compliance and minimizing the risk of unintended tax implications. By adopting a proactive and integrated approach, companies can effectively manage challenges from both operational and tax perspectives and enhance tax efficiency and compliance. Therefore, it is imperative for companies to prioritize transfer pricing monitoring, implement robust policies and processes, and engage with relevant specialists to navigate the complexities of the global tax landscape successfully.

RSM is a thought leader in the field of International Tax and global tax policy. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of global tax reforms, regulatory obligations, and practical applications in working with multinational corporations. If you want to delve deeper into the complexities of international tax policy in a constantly evolving world, please reach out to one of our consultants.