Transfer pricing – the basics on the concept

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Transfer pricing is both an opportunity and a threat, and its impact on affiliate business is significant. Approaching such a broad field can benefit companies in terms of operational advantages, such as knowing the transactions with affiliates and identifying opportunities to allocate income and expenses, deep understanding of the business model and optimization possibilities, which, in other conditions could be overlooked.

Transfer pricing – Definition

By definition, transfer prices are the prices at which transactions between companies that are part of the same group (also called affiliates).

By law, the transaction between related parties must be concluded at market price, in other words at the price at which a similar transaction between independent parties would have been concluded, under comparable economic conditions. If the price of the transaction between affiliates is not in the “market range”, it is considered that the profits obtained by the parties as a result of the transaction are not correctly reflected, thus affecting the taxes and fees paid.

The concept of “transfer pricing” refers to the complex of laws and practices by which countries ensure that the profits earned from the intra-group transfer of goods / intellectual property rights / services is declared and taxed where it is earned.

This is an important aspect, given that transfer pricing can increase the profit paid by the group in jurisdictions with low taxation or, conversely, can reduce profit, where taxation is high – the so-called process of “BASE EROSION AND PROFIT SHIFTING” (BEPS).

The term “transfer pricing” is used in the case of transactions made between affiliates, those transactions that are not subject exclusively to the rules of the free market and, therefore, may be influenced by other subjective factors.

Why is transfer pricing important?

The transfer pricing policy companies are adopting can influence not only the profitability of affiliates through the reallocation of profits, but also the investment decisions of the group, the business model to be implemented, cash flow and performance indicators of the company.

Transfer pricing is both an opportunity and a threat, and its impact on affiliate business is significant. Approaching such a broad field can benefit companies in terms of operational advantages, such as knowing the transactions with affiliates and identifying opportunities to allocate income and expenses, deep understanding of the business model and optimization possibilities, which, in other conditions could be overlooked.

Privately owned companies need to set effective tax policies that are in line with the needs of the business model and that are also supported by the tax authorities.

These companies may face numerous challenges in developing and implementing transfer pricing policies and in preparing related documentation, especially due to limited internal resources and the complexity of this subject.

Optimization through clear transfer pricing policies

Transfer pricing is both an opportunity and a source of risk, with its impact on affiliate business being significant. The right approach benefits companies in terms of operational advantages, such as knowing the transactions with affiliates and identifying opportunities for allocating income and expenses, deep understanding of the business model and optimization possibilities.

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