Using Transfer Pricing Wisely and Strategically
As companies expand globally, there are opportunities to make smarter business decisions that maximize revenue. Using strategic transfer pricing can be helpful, but the process may be difficult to understand and execute properly. With guidance from tax experts at KBKG, you can make this a productive part of your financial strategy.
Understanding Transfer Pricing
What is transfer pricing, and how can it help your company? This strategy is the act of one company selling goods, royalties, services, or debts to a subsidiary or partner company, often across international borders.
For instance, a company based in the United States sells products to its Mexican subsidiary. While the organization ultimately retains the assets, the tax obligations in each country can shift.
Effectively strategizing your tax planning becomes particularly crucial when tax laws evolve and debates concerning tariffs and trade regulations emerge. It is important to stay updated on these changes and adapt your tax planning accordingly. By doing so, you can ensure that you are making informed decisions and maximizing your tax benefits.
Additionally, staying informed about changes in tax laws and trade rules can help you avoid any potential penalties or legal issues. Therefore, it is crucial to regularly review and adjust your tax planning strategies to align with the current regulations and policies.
Challenges of Transfer Pricing
Because this strategy balances tax debts between multiple countries, it can come under scrutiny. There is often a worry that a corporation won’t pay its fair share of taxes. This is one of the reasons it pays to have a tax professional create a transfer pricing plan for you.
The Arm's Length Principle
An important part of executing this strategy properly involves following the arm’s length principle. Prices charged between related parties should be comparable to prices charged to outside groups in the same situation.
Managing Different Tax Laws
Variances in tax laws are also a concern that can be addressed with transfer pricing. Every country has its own set of regulations and tax treaties, including different deductions, credits, and penalties. When companies begin to split tax burdens between different jurisdictions, it can be hard to reconcile all the filings. To avoid this, let an expert help you put transfer pricing into place.
Types of Transfer Pricing
Businesses have options when it comes to which assets they sell. This allows leaders to take advantage of changing circumstances within the company, industry, and regulatory landscapes.
Goods
Moving goods is the most straightforward transaction, but it comes with a lot of rules. During the transfer pricing of goods, you must ensure that the pricing is reasonably close to fair market value. You are required to show that the arm’s length pricing rule was followed, and no one was unfairly favored or harmed.
Royalties
The arm’s length principle is also crucial in determining fair market royalty rates. Royalties often deal with intellectual property such as patents, trademarks, and copyrights. When owned by an entity, these royalties can generate a lot of revenue.
Services
When using transfer pricing for services, it’s important to carefully document the value of the services exchanged. Ensuring fairness in transactions and preventing the use of the exchange to evade taxes factor into this. KBKG can help you document deals correctly to avoid regulatory issues and audits for your business.
Loans
Lastly, there is the complex area of moving loans between related entities. To ensure fair interest rates, the party getting the loan should compare them to rates offered by other groups.
KBKG Can Help With Transfer Pricing
Your company can pay taxes in all areas it operates, while also dividing the tax burden in a sensible manner. Transfer pricing can get you there, so reach out to KBKG today to start building your plan.