Transfer Pricing as a strategic business tool

Transfer Pricing as a strategic business tool

Transfer pricing in the modern times should be perceived as a business opportunity rather than simply a tax challenge. By incorporating transfer pricing into financial and corporate planning it helps to mitigate the risks for companies competing in a global economy.

Although tax and financial managers and directors realize the importance of transfer pricing, it is rather unfortunate that not always do we have a situation when transfer pricing is incorporated into strategic decision making. For companies which effectively manage their transfer pricing, they gain coordinating lever over their global operations. Thus, transfer pricing can and should become an indispensable strategic tool to increase earnings and in measuring performance. It is not simply a tax compliance issue. It is a business opportunity to be seized at the highest executive levels.

The concept of Transfer Pricing

Taxing jurisdictions naturally seek to tax their fair share of global profits. Most countries have adopted an „arm’s length standard” to protect their revenue base in evaluating the transfer prices of companies which operate within their country. Under the arm’s length standard, inter-company prices are judged against the prices that would have been charged for each transaction if the companies were negotiating at arm’s length, that is, if they were unrelated.

Many countries, including Romania, have adopted the arm’s length standard through very detailed rules specifying various methods to be applied in different circumstances. These methods attempt to measure prices or results from comparable unrelated transactions to benchmark the related company transactions. Many countries including Romania also impose requirements to formally document transfer pricing policies, the absence of which subject a taxpayer to penalties if the transactions are deemed to be non-arm’s length.

The international environment for Transfer Pricing

Companies might expect that if inter-company transactions are undertaken at arm’s length, they should be respected by revenue authorities on all sides of the transaction. Unfortunately, there is no consensus nor consistency in the transfer pricing rules or their application across tax jurisdictions, even though nearly all major industrialized countries embrace the arm’s length principle. It is not uncommon for a given arm’s length method acceptable in one country to be unacceptable in another country, even where revenue authorities have entered into formal agreements to share taxpayer information amongst themselves and have in fact compared notes in the process of arriving at their respective adjustments on an organization.

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