Enterprises looking to grow their business enter new markets located in different parts of the world. This necessitates adhering to various compliance regulation besides understanding the implications of cross-border transactions on their tax liabilities. One of the major concerns of multinational enterprises (MNEs) is transfer pricing which involves ascertaining the price for a transaction involving the exchange of goods between related entities. OECD’s Base Erosion and Profit Shifting plan for addressing the issue of tax avoidance by corporations has been adopted by a large number of countries. This has made it essential for companies to engage agencies like top transfer pricing firms in India to frame transfer pricing agreements. Let’s take a look at some useful tips that will be helpful in this regard.
1. Prepare Extensive Annual Documentation
Companies must prepare detailed documentation related to transfer pricing agreements in all the jurisdictions where they run operations. They must generate invoices for all such transactions which fall under the purview of transfer pricing guidelines. These invoices must include a proper description of the transaction. Creating documentation in various geographical regions where related entities are involved in similar transactions will help in saving time. Moreover, determining the requirements in each jurisdiction and the transfer pricing adjustments that must be made will be beneficial in planning for similar activities in the future.
2. Learn About The Arm’s Length Principle
Corporations must engage professionals who have extensive knowledge about the Arm’s Length Principle (ALP). This principle is used to calculate the price of a transaction between two related entities. It takes into consideration a similar transaction involving unrelated bodies and tries to set a similar price for the arrangement between related groups. Most nations who have adopted suggestions listed in OECD’s BEPS plan advocate the application of the principle for finalizing a fair price for transactions which fall under the transfer pricing category. All countries use ALP in a different manner and sometimes in combination with other rules. Enterprises must know about all the relevant laws of a jurisdiction before framing their strategy.
3. Know About The ALP Calculation Methodology Of Different Jurisdictions
As important it is to know the legal regulations which govern transfer pricing in a country, it is vital to know the methodologies used for ALP calculation. In some nations, a direct pricing comparison test is done to arrive at a fair price while in others a profits-based test is conducted. The cost of the transaction is affected by various factors like the amount of the merchandise being transferred and the geographical distance over which it was moved. Companies must ensure while doing comparisons that the transactions involving unrelated parties being used for the purpose happened in similar conditions to their arrangement. Engaging transfer pricing agreement experts in the jurisdiction will be a sensible move to avoid any issues.
4. Consider Advance Pricing Agreements
Advance pricing agreements (APA) are a good way to avoid transfer pricing disputes. These contracts regarding a cross-border transaction between related parties are made between a business entity and a tax authority. APAs can be used to cover deals which took place in previous years as well as those which will happen in the future. There can be bilateral as well as multilateral APAs meaning taxpaying entities can enter into deals with one or more than one tax authority through the mutual agreement procedure.
5. Update The Transfer Pricing Policy Regularly
Transfer pricing is a critical issue which needs constant attention and companies must keep fine-tuning their approach continuously. Reviewing the policy will help in monitoring all the transactions within the enterprise and keep them in accordance with the stipulated regulations. This will also be helpful in smooth auditing of the records. New opportunities for growth or saving taxes can also be discovered with periodic reviews.
International trade provides corporations with new opportunities for growth but at the same time with rising concerns about tax avoidance in most nations, it throws up challenges like the pricing of cross-border transactions. Transfer pricing agreements are complex issues and companies must engage knowledgeable experts to handle them.