Transfer Pricing Frequently Asked Questions
KBKG has received a lot of frequently asked questions (faqs) related to transfer pricing and how it can benefit companies. Common questions and answers are outlined below.
What is transfer pricing?
Transfer pricing regulations govern the intercompany prices of transactions within a multinational company. The cross-border transfer prices of goods, royalties, services, and loans drive how much income tax a multinational company pays by country. Transfer pricing is widely considered the most contentious tax issue for multinational companies, and all companies with cross-border operations have transfer pricing issues.
Why should companies review transfer pricing?
All companies with cross-border operations have transfer pricing issues. The cross-border prices charged on goods, services, royalties, and loans drive how much tax is paid in each country. Simply stated, tax authorities are concerned about multinationals underpaying taxes through incorrect transfer prices. Transfer pricing audits can result in substantial additional tax and penalties on a global basis.
Transfer pricing also impacts a company's global effective tax rate. We find that many companies can optimize cashflow with a strategic review of transfer prices. Furthermore, some companies can realize substantial tax savings under tax reform through corrections to transfer pricing. Transfer pricing also affects FDII, GILTI, and BEAT calculations under US tax reform.
Is transfer pricing more than a compliance issue?
Absolutely! Intercompany pricing affects cashflow, global effective tax rates, debt service, corporate reputations, and even compensation! How?
- Global Effective Tax Rates – Transfer pricing affects where a multinational’s profits are generated by jurisdiction, so a company’s global effective tax rate is driven by taxes payable by country.
- Global Cashflow – Transfer prices have an impact on where cash accrues by country. With an inefficient transfer pricing system, multinationals may find excess cash buildup in one country when needed for investments somewhere else.
- Debt Service – Similarly, leveraged companies may not have the cash to service debt with ‘trapped’ cash unavailable for payments.
- Corporate Reputation – Companies not paying their ‘fair share’ of taxes are popular targets for politicians and the general public. Starbucks, Coca-Cola, Amazon, Apple, Google, and many other brand-name companies have faced condemnations over tax structuring in recent years.
- Compensation - What if the managing director of one subsidiary earns higher compensation by overcharging a sister company? Effectively, transfer prices can promote counterproductive behavior, leading to tax overpayments in one country and underpayment of tax elsewhere. Moreover, negotiations of cross-border pricing become a regular source of disagreement among management team members.
What is the best overlooked savings opportunity in transfer pricing?
In our experience, strategies to correct transfer prices and utilize tax net operating losses (NOLs) are often a high return on investment for companies of all sizes. For many multinationals, the transfer pricing policy leads to generous profits in some countries while incurring losses in other locations. In essence, the transfer pricing approach may not lead to realistic tax results. With substantive changes, companies may:
- Pay less tax in profitable jurisdictions while utilizing NOLs in loss-making companies
- Lessen tax audit risks; and
- Improve cash flow by paying less overall income tax
Where to start?
- Identify group companies with tax losses that transact with related companies generating tax
- Are there commercial reasons for changing intercompany prices on goods, services, or intellectual property?
- Do intercompany legal agreements permit changes to transfer prices? If not, can the contracts be revised?
- Consider transfer pricing documentation to justify modifications to intercompany pricing arrangements
What are my options for supporting transfer prices?
Under audit, tax authorities in the US and internationally can demand evidence that cross-border prices are charged on an "arms-length" basis. Annual transfer pricing documentation reports are prepared to justify intercompany prices to tax authorities. A documentation report provides companies their first and best chance to avoid a transfer pricing audit in the first place. Depending on company size, many countries require annual transfer pricing documentation.
We have extensive experience in preparing US, OECD/BEPS transfer pricing documentation. We can also update your existing transfer pricing documentation for annual compliance purposes.
Documentation is not the only option for many companies, where appropriate, we have other practical alternatives depending on a company's risk profile and budget limitations.
Why consider KBKG for Transfer Pricing Services?
KBKG delivers as much practical transfer pricing expertise as the largest firms but with a focus on tax savings. KBKG delivers time-tested solutions with Alex Martin’s 20-plus years of full-time US and international transfer pricing experience. We understand how tax authorities assess transfer pricing issues and mitigate risks accordingly. We also develop transfer pricing strategies to improve company cashflow.
Professional service firms across the US and internationally rely on our transfer pricing expertise to complement their tax and accounting offerings. We offer complimentary group training webinars for your team.
As a tax specialty firm, we serve as your resource: your sounding board for questions all the way up to, and including, high-stakes transfer pricing audit defense.
How many countries has KBKG advised on transfer pricing?
We have advised clients on transfer pricing issues with these countries:
- Czech Republic
- Hong Kong
- New Zealand
- Papua New Guinea
- South Africa
- South Korea
- Plus the Bosnian government as a World Bank project advisor