Transfer Pricing Is Big Tax Risk for Multinationals

Transfer pricing is a complex area of tax risk affecting multinational groups. It is a major focus for local tax administrations and supranational bodies. Non-compliance can affect reputation and result in significant financial liabilities in the form of adverse transfer pricing adjustments, fines and penalties. “Transfer prices” are the prices at which an enterprise transfers goods and intangible property, or provides services or financial support, to associated enterprises. Transfer prices determine, in large part, the taxable profits of associated enterprises in different tax jurisdictions.

Inter-company agreements (often referred to as ICAs) are legal agreements between related parties. They define the legal terms on which services, products and financial support are provided within a group. It is accepted that inter-company agreements are a fundamental part of transfer pricing compliance for multinationals.

Inter-company agreements should be short and expressed in simple language. Avoid quoting statutes and regulations. The key commercial terms should be grouped in one place. Each inter-company agreement should be consistent with the legal relationships regarding the ownership and use of assets, the flow of supplies, related contractual relationships with third parties, and the allocation of risk in those relationships. The proposed inter-company agreements should be reviewed by all relevant stakeholders to ensure that the agreements reflect the needs of the whole group, as well as the reality of intra-group transactions.