Global businesses are developing increasingly decentralized structures, which ensure proximity to the local market and have a considerable information advantage over centrally organized companies. This makes the topic of transfer pricing ever more relevant.
What is transfer pricing?
Transfer pricing refers to the pricing of goods or services exchanged between entities or subsidiaries within a company that operates in multiple countries. It is an essential concept for globally acting corporations that conduct cross-border transactions.
Transfer prices can have a significant impact on the financial performance of a company, as they affect the allocation of profits among the different entities within the company. Inaccurate transfer pricing can lead to tax implications, including penalties, double taxation, and a damaged reputation.
As a result, transfer pricing poses unique challenges for companies that operate globally. It requires adherence to national and international tax regulations, including documentation of all transactions, appropriate for each interaction and each country involved. Companies must establish and maintain transfer pricing policies that are consistent with the arm's length principle, which means that prices charged for goods or services must be comparable to prices charged for similar goods or services in a market transaction between unrelated parties.
Fiscal and legal considerations are becoming as prominent as economic aspects in multinational corporations, as transfer pricing can impact a company's tax liability and regulatory compliance. Multinational corporations must also keep abreast of changing tax laws and regulations in the countries in which they operate to ensure that their transfer pricing policies comply with local regulations.
Transfer pricing - getting your compliance right
Legally watertight transfer pricing for shared services in a global corporation requires the following basis:
- Transparent calculation and analysis of transfer prices for shared services across a multi-layered value creation chain, down to the level of receipts for primary expenses.
- Transparent representation of service consumption (quantities) and the used settlement key (transaction matrix).
- Integrated representation and administration of service contracts between service providers and recipients as the legal basis of the supply relationship.
In summary, transfer pricing is a critical concept for multinational corporations that engage in cross-border transactions. It requires adherence to national and international tax regulations and comprehensive documentation of all dealings, appropriate for each interaction and each country involved. Accurate transfer pricing is necessary for companies to avoid tax implications and maintain regulatory compliance while effectively allocating profits among different entities within the company.
How to make your billing transparent, compliant and audit-proof
- Serviceware’s own software solution for the Financial Management of IT and Shared Services offers – among other things – functionalities for handling transfer pricing documentation. Read our free white paper.
- Our 50 minute webinar goes in-depth about transfer pricing and how we can help.
- Speak to an expert: Serviceware's cooperation with KPMG strengthens the joint offering for customers in the field of transfer pricing. Get in touch to find out how to make your billing transparent, compliant and audit-proof.