Transfer pricing involves the terms and prices at which related parties sell goods or services to each other. When the parties are located in different taxing jurisdictions, opportunities exist for the movement of income to a lower-taxing jurisdiction. Some countries require the completion of transfer pricing documentation to support the taxpayer’s reporting position by comparing a company’s results to comparably situated unrelated parties. Such an analysis can help a company comply with the documentation requirements and enhance its tax planning. Whether transfer pricing documentation is needed or not, this analysis can uncover possible tax savings or justify price adjustments that may be planned for business reasons.
Optimizing Your Transfer Pricing Arrangement
Who pays the tax, and where, on international business transactions can mean millions of dollars to countries and businesses. By taking control of the sometimes complicated transfer pricing process, mid-sized businesses can save thousands of dollars in taxes and better manage the risk of running afoul of tax authorities.
How Transfer Pricing Arrangements Work
Virtually all countries now have and enforce transfer pricing laws. The basic rule of thumb is that transfer pricing of inter-company transactions should be at “arm’s length,” or within a range that would be charged if the companies were independent of each other. But how you establish that arm’s length relationship can have a huge effect on your tax bill — particularly if the tax burden in one country is significantly less than the burden in another.