The number of disputes in transfer pricing is rising. Nike, Facebook, Apple, Starbucks, and GE are just some examples of MNEs that have been or still are subject to disputes in the industry. In addition to that, the counter-parties of these disputes are supranational organizations, aside from tax authorities. Of course, it isn’t simply huge MNEs that face this problem, small MNEs are also subject to these disputes.
Today, we are going to share with you several common price transfer disputes and how to avoid them.
All price transfer is open for debate in theory. Therefore, there is always a chance for a dispute. However, particular controlled transactions and business practices bear a greater risk of disputes compared to others.
Controlled transactions that include intangible assets get a lot of analysis from tax administrations. Of course, there’s a reason for this. Intangible assets can be transferred easily within an MNE unlike fixed assets such as inventory and factories. Thus, it’s simpler to allot revenues of these forms of assets to an associated company in a low-tax location. This type of profit alteration is one thing that tax authorities don’t like. Because of this, disputes commonly happen.
MNEs incur a lot of expenses when doing centralized functions. Normally, transfer pricing regulations enable the recharging of these expenses to the operational bodies of the MNE as service fees or management fees. For those who don’t know, operational bodies are met with huge management fees. This affects their financial performance.
Tax administrations in particular areas are unwilling in enabling operational bodies a deduction in fees since this reduces their tax collection and taxable profit. India, China, and Brazil are some of the countries know to have a vital attitude towards the management fee deduction.
Normally, restructuring includes the transfer of risks, functions, and assets from one associated company to another. Thus, restructuring can lead to invisible and visible controlled transactions. There can be consequences in both cases for the price transfer. Therefore, it increases the possibility of a dispute.
How to Avoid Disputes
Nobody wants price transfer disputes except for attorneys. Disputes take time to resolve, cost money, and produce uncertainty. Thus, every person wants to try their best to prevent disputes. However, there’s no way to guarantee you will not run into them. Price transfer actually is a fight of beliefs. The result is always open to analysis. In addition to that, there are a lot of aspects that you can’t control. This includes the appetite for risk of the CFO and the evolving price transfer policies of local tax administrations.
Therefore, you can only try to lower the risk of a dispute. There are a couple of basic measures you can follow:
- For sizable controlled transactions, think about advance pricing agreements.
- Do not take aggressive positions too much.
- Establish an excellent relationship with the tax administration.
- Comply with the price transfer deadlines and rules.
- Prepare solid price transfer documentation.
These tips are quite easy to incorporate and you can do it in a cost-efficient way.