transfer pricing: balancing stakeholders requests
DESCRIPTION
Transfer Pricing must be an strategy across main areas inside a company that is making global transactions. Most governments now have regulations and balancing each stakeholders request is an interesting challenge for TP Managers. Having the right transfer price is difficult, but the balance can be reached.TRANSCRIPT
Transfer Price
Tax Division
Custom s Division
Supply & Chain
Local / Affiliate
ManagementGovernment
Sales
Planning
Daniel A. AlarcónETAM Alarcon ConsutoresEl Salvador, 2014
Introduction
• Transfer Price could be defined just as: Priceat which a transaction between parentcompanies is made.
• You can find many definitions from simple tocomplicated, but the important fact is thatare the prices occurring between companiesor divisions in which there is a relation(through stakeholders or management) thatmake the transaction a “related transaction”.
• Most governments worldwide haveimplemented transfer pricing regulations,because is a way in which they can avoid taxevasion, promote free market transaction,avoid internal price disturbances and havecontrol on foreign transactions that clarifytax payments.
Strategic
• For multinational companies theTransfer Pricing must be a strategy,not only to have the right priceand right margins but to avoid anypotential contingency becauseeven though OECD regulationshave been established; manycountries have developed specialregulations.
Why a Balance between Stakeholders is required?
• Putting apart the governments, becausethey regulate, require information andreporting of related parties transactionsand have established procedures tofollow; main stakeholders are the sameinternal divisions, which goals andobjectives are totally different and atransfer price can make the difference.
• Specific divisions inside the companycare about what a government orcountries regulators are demanding,example: Price regulations, levels ofprice change authorized by customs,impact of customs taxes, impact ofincrease or decrease in pricing.
Main Stakeholders• 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
Tax Department
Main Stakeholders• 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 not 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
Customs Department
Main Stakeholders
• 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.
Supply & Chain
Main Stakeholders• .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
Planning, Sales & Finance.
Main Stakeholders
• 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.)
Local Management
.
A management decision
• 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.
Central America as example
• 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.
Consults, inquiries and comments,
please address to:
Daniel A. Alarcón
ETAM Alarcón Consultores
El Salvador, Central America.