Transfer Pricing: Balancing Stakeholders requests

Transfer Price could be defined just as: Price at which a transaction between parent companies is made. You can find many definitions from simple to complicated, but the important fact is that are the prices occurring between companies or divisions in which there is a relation (through stakeholders or management) that make the transaction a “related transaction”.

Most governments worldwide have implemented transfer pricing regulations, because is a way in which they can avoid tax evasion, promote free market transaction, avoid internal price disturbances and have control on foreign transactions that clarify tax payments.

For multinational companies the Transfer Pricing must be a strategy, not only to have the right price and right margins but to avoid any potential contingency because even though OECD regulations have been established; many countries have developed special regulations.

Why Transfer Pricing requires a Balance between Stakeholders?

Putting apart the governments, because they regulate, require information and reporting of related parties transactions and have established procedures to follow; main stakeholders are the same internal divisions, which goals and objectives are totally different and a transfer price can make the difference.

Specific divisions inside the company care about what a government or countries regulators are demanding, example: Price regulations, levels of price change authorized by customs, impact of customs taxes, impact of increase or decrease in pricing.

When a company manufactures a product the transfer price is reflecting the current cost and covers the additional costs, margin, transport, etc.  But must respect how the regulation in the target country (parent or related company) has, in order to avoid potential issues.

Let’s talk a little about main stakeholders:

·         Tax department. Tax people see Transfer Pricing as a company impact, because they must care about gross margin that the related company has with the transfer prices the HQ is charging. This is in accordance with OECD (Organization for Economic Cooperation and Development) regulations. Tax people see country impact and do not care at product level. It is important to indicate that Gross Margin is a main measure governments require under the Transfer Price (TP) studies or reports and is why Tax departments are monitoring the global gross margin the local company is reaching which must be in those ranges authorized by local regulations.

·         Customs Department. They know about price regulations, increase or decrease limits, current or potential taxes. They have to analyze product by product impact. Some countries as Taiwan establishes increase maximum level, Russia you can decrease prices without validating impacts, Thailand maybe won’t permit increments. Before sending a new TP (Transfer Price), you will need to have Customs Department validation. From government perspective if you decrease a price you will be paying less customs taxes, so they care about these movements.

·         Supply & Chain. They care about inventories and a Transfer Price could affect movement of supplies and goods, valuation methods, transit inventories, final margins. They must know at which price goods will be moved in the future periods.

·         Planning, Sales & Finance. A transfer price is a sales price from Headquarters (HQ) perspective but at local or country level it becomes the local primary cost for the affiliate or parent company. If HQ needs to increase prices and there are local regulations not allow doing it, Planning division has to work with the affiliate because margins will be affected and someone must absorb the impact. If HQ increase is high and affiliate cannot pass the cost to their customers, local margins and budgets will be impacted. Again, Planning will have to raise hands and ask for explanations.

·         Local Management: Local or Affiliate teams must have a good knowledge of Transfer Pricing, because sometimes a new price is set up by HQ in concordance with Tax and Customs  in order to avoid legal or tax contingencies, therefore local managers will need to understand and make appropriate market decisions (absorb, rise or decrease prices, etc.)

Transfer Pricing is a management decision, that is why a good advisory is necessary. Must Audit Firms have specialized teams to support you in this key activity and provide you the right answer to avoid contingencies. They know which methods the local governments are using or have authorized and the type of reports and information required, they can evaluate impacts and provide training and help to accomplish.

In Central America, governments began asking for reports about transactions with related parties, amounts, origin and type of transactions. Soon they will be making Audits and increase validations, therefore is a good time to review and ensure all of your transactions with HQ or related parties are accomplishing regulations and have your TP Study ready.

Sometimes we think that if we do not make transactions with foreign companies, this type of regulation won’t affect us. Important to mention that in most, government regulations are including local transactions between related parties because the transfer price definition is about related parties, no matter if they are out or inside the country.