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Transfer Pricing

Two questions....Does anyone have a transfer pricing policy that addresses settlements between entities that they can share? And has anyone written up and documented transfer pricing rule/support for your company without using an external firm? What framework did you use or what did you use as a guide?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Patrick,

I've had them in the past, and a few are in place at the moment. There are basic rules to follow, and the most important part of all this is clearly document that you are following the rules. Beyond that, the agreement / policy can be less than a page. And I've never used an outside firm to write it, but I've definitely run it past my auditors before the end of the year!

The rules, as I understand them (not a technical accountant here), are that you have to capture in the transfer pricing the shared cost, shared risk, and shared profit. That could best be demonstrated by a "what would this look like in an arm's length transaction". If that calculation isn't possible (and often isn't), I've striven to set up the pricing so that if one party loses money, both lose money, and vice-versa for profit.

The mistake you want to avoid is if one entity is profitable, and the other isn't you'll likely raise eyebrows, especially if you're crossing tax jurisdiction lines. To properly move profits around, which may be appropriate, it is a reasonably complex structure which you should do with a specialist.* If you're not doing that, then simpler is better.

The structures should conform to the transactions between your companies. It is a cost-sharing agreement? A technology license? A cooperative development agreement? Each of these have slightly different structures, rules and purposes....so without knowing what the economic structure is, I'm out of advice.

Past the structure, the agreement should say:
Parties involved
Period of the agreement
How it refreshes and when
How the calculation is made
When the settlements are done

Cheers,

Keith

*http://techcrunch.com/2013/10/28/the-double-irish-could-be-endangered-preventing-companies-like-google-and-twitter-from-shedding-tax-liabilities/

Topic Expert
Edward Abbati
Title: Vice President of Finance
Company: Location Labs
LinkedIn Profile
(Vice President of Finance, Location Labs) |

You need to be careful depending on the country to use only internal resources. India, for example, has a requirement that a fully transfer pricing analysis be done at least every two years. We just completed one in which our TP went from 15% to 18%. Other countries like in the EU are less stringent. We use 5% for Spain with out any external analysis, except for our Tax folks recommending a range, and we have had no issues.

John Herndon
Title: Senior Consultant
Company: NOWCFO
(Senior Consultant, NOWCFO) |

Patrick
You have several questions that should be addressed separately as I believe they are mutually exclusive:
1. Does anyone have a transfer pricing policy that addresses settlements between entities that they can share?

Ans: Be cautious when using a 'cookie cutter' approach to drafting an inter-company agreement. These documents are very situation specific, for example an I/CO agreement addressing a cost sharing arrangement (i.e., R&D) in a manufacturing environment will be very different from a "services" firm. It is a good idea to keep these situations apart as not only is the environment different but the laws as well; I am not referring to country specific laws but Common vs Civil law as a foundation.

And has anyone written up and documented transfer pricing rule/support for your company without using an external firm?

Ans: Yes, this is possible but I highly recommend that someone knowledgeable in the process draft the agreement. There are 'rules of thumb' that can be adopted, however, a person with an understanding of the questions to ask and direction to take in creating and fulfilling the contemporaneous standard must be seen from an informed point of view.

What framework did you use or what did you use as a guide?

Ans: IRC 482 and OECD guidelines.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

Only John here mentioned the tax implications. In my own, limited experience with multi-state and multi-national transfer pricing, tax law was the driving item in setting them. And sometimes, it just felt like you couldn't win, no matter what you did. Everyone was out to maximize their cut. ;-(

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