Transfer pricing guide: funds, rules and regulations
Transfer pricing is a key aspect of international business and tax. It involves setting the prices at which services, goods and intellectual property are traded between related entities within a multinational corporation.
Moore Kingston Smith aims to provide a comprehensive overview of transfer pricing, including its mechanisms, key components, funds transfer pricing, rules, SME exemptions, future trends, and how you can benefit from the services we provide.
Understanding transfer pricing: what is transfer pricing?
Transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control. These transactions can include the sale of goods, the provision of services, the use of intellectual property, and other financial or commercial interactions.
The primary goal is to ensure that transactions between related entities are conducted as if they were between independent enterprises, a principle known as the arm’s length principle. This principle is crucial because it helps prevent profit shifting to low-tax jurisdictions, which helps to ensure that a fair amount of tax is paid.
How does transfer pricing work?
In simple terms, transfer pricing works by setting the price for transactions between related entities within a multinational company.
These prices must be comparable to what would be charged between independent parties in an open market, requiring a provable market price to be agreed beforehand. To achieve this, companies must use one of several methods outlined by tax authorities, such as the Comparable Uncontrolled Price (CUP) method.
Other methods that UK tax jurisdictions will accept include:
- Resale price method
- Cost plus method
- Transactional net margin method (TNMM)
- Profit split method
Key components of transfer pricing
Transfer pricing involves several key components that companies must consider to comply with regulations and avoid penalties, which requires a comprehensive approach to transfer pricing as a whole.
Documentation
Having clear and accessible documentation is vital. You must have all details relating to the transaction, the pricing method used, and evidence supporting the arm’s length nature of the transaction.
Transfer pricing methods
Companies must choose and apply appropriate methods (listed above) to determine transfer prices. These methods should be relevant to the nature of the transaction and the industry the business belongs to.
Benchmarking analysis
This involves comparing the transaction to similar transactions between independent entities to ensure compliance with the arm’s length principle.
Intercompany agreements
You must have access to the agreements made between related parties and you must be able to show that they are in place at the time of the transaction, outlining the terms and conditions that were agreed upon.
Compliance and reporting
Regular reporting to tax authorities and ensuring compliance with local and international transfer pricing regulations is essential and should make the whole transfer pricing situation much easier to navigate.
What is funds transfer pricing: transfer pricing funds explained
Funds transfer pricing (FTP) is a specific aspect of transfer pricing used in the banking and financial services sector. It refers to the internal pricing mechanism used by financial institutions to allocate the costs and revenues of funding sources across different business units.
This is not something that will be relevant to most businesses, but it’s still worth having a broad understanding of what it is. This helps in assessing the performance of different business units, managing liquidity risk, and ensuring regulatory compliance.
Transfer pricing rules
Several transfer pricing rules have been established by tax authorities worldwide to ensure that multinational enterprises do not manipulate transfer prices to shift profits to low-tax jurisdictions.
Key global guidelines are provided by the Organisation for Economic Co-operation and Development (OECD) in its transfer pricing guidelines for multinational enterprises and tax administrations. These rules generally require:
Adherence to the arm’s length principle
Transactions between related parties should be priced as if they were between independent parties. This is referred to as “arm’s length prices” and should be in line with the current market price.
Documentation requirements
Companies must maintain detailed documentation of their transfer pricing policies and methodologies. If you want to adhere to the OECD Transfer Pricing Guidelines, having a clear paper trail is essential.
Country-specific regulations
Each country may have additional regulations and reporting requirements. For example, the United States has Section 482 of the Internal Revenue Code, while the European Union has the EU Joint Transfer Pricing Forum.
Transfer pricing: SME exemption
The UK stands apart from most jurisdictions as it has an SME transfer pricing exemption from mandatory transfer pricing for UK companies that are not part of multinational groups (broadly, on a group-wide basis, with fewer than 250 employees and either turnover less than €50 million or assets less than €43 million).
While this may result in many UK small and medium-sized entities (SMEs) being able to take a relatively light-touch approach to transfer pricing, it should be remembered that the UK’s exemption does not extend to most other jurisdictions.
A large UK entity operating cross-border will still need to consider its role in the group transfer pricing policy, with the documentation of a group policy being driven by the UK, assuming the group is headquartered here.
Future trends in transfer pricing
When it comes to looking ahead, it’s worth having an open-minded approach. Transfer pricing is a dynamic field that is always changing in response to the various regulatory environments. Here are some trends that could reshape the transfer pricing landscape:
Digital economy and intangibles
The rise of the digital economy and the increasing importance of intangibles (such as intellectual property) are challenging traditional transfer pricing methods. This has resulted in tax authorities now focusing more on how to attribute value and taxable profits to digital activities.
Increased transparency and reporting
Initiatives like the OECD’s Base Erosion and Profit Shifting (BEPS) project are driving greater transparency and reporting requirements. Country-by-country reporting (CbCR) requires multinational companies to provide information on their global activities and international tax positions.
Greater scrutiny and audits
UK law and tax authorities are becoming increasingly scrutinised when it comes to transfer pricing practices. This could result in more frequent audits and investigations to ensure compliance with transfer pricing rules.
Work with Moore Kingston Smith
Understanding the complex details of transfer pricing requires expertise and experience. Moore Kingston Smith is a leading provider of financial and corporate advice, offering comprehensive solutions to help businesses navigate transfer pricing rules and regulations, simplify their transfer pricing policies, and manage potential risks.
By working with Moore Kingston Smith, you can ensure that your transfer pricing strategy aligns with UK and international tax requirements and industry best practices, minimising the risk of disputes and penalties from tax authorities. Contact Ruth Brennan to learn more about how we can support your transfer pricing needs.
