Designing a Structure for Transfer Pricing (TP)

Multinational companies often trade between their own branches / associated enterprises in different countries. This often raises a big question: What should be the ideal price at which these internal transactions should be entered into? If the prices are set too low or too high, they can affect profits and in turn can impact on taxes, create legal problems and cause audit inquiries and investigations.

To fix this, companies need a well-designed TP structure. This helps them price their transactions correctly, follow rules and avoid unnecessary problems.

Let’s explore how to build an ideal TP structure, one that works, with Tax Gian, one of the best transfer pricing consultants in the UAE.

What Is an Ideal TP Structure?

A TP structure is a system that helps decide how much one part of a multinational group should charge another part, for goods, services, and/or intellectual property etc. These exchanges can happen either within the same country or across borders.

It mainly applies to:

•       Deals with related entities within the same country
•       Deals with related entities situated in other countries
•       Payments to key people within the entity, viz. shareholders, directors and KMPs (key managerial personnel).

The Main Purpose: Arm’s Length Pricing

The key rule of any TP structure is the arm’s length principle. This means that the price should be similar to what unrelated companies would agree upon, in the same or similar circumstances. For instance, if Entity A sells software to its branch in another jurisdiction, the pricing should be comparable to what an unrelated buyer would pay for the same software.

This helps, inter alia:

• Determine correct profit/loss;
• revent tax manipulation;
• Conform with international regulations; and
• Promote fairness and transparency.

TP Structure: Building Blocks

Here are the key pieces that make up a strong TP structure:

1. TP Policy

This is the documented plan that establishes pricing guidelines for the group. It should include:

• Transaction types covered.
• Strategies/methods used for pricing.
• Rules for documentation

2. Intercompany Agreements (ICAs)

ICAs are formal agreements made between various members of the same group. They clarify:

• What is being offered or sold?
• Who bears responsibility for what?
• How much will be paid?

Tax authorities often review these agreements. So, they must be accurate and reflect real business dealings.

3. Economic and Functional Analysis

Before deciding on prices, entities need to analyze:

• What functions does each party perform?
• What assets are deployed to carry out the functions?
• What risks are taken by the parties in the course of performing the functions?

This is called FAR analysis (Functions, Assets, Risks). It helps with choosing the best pricing method. TP consultants in Dubai can help you with this type of analysis.

4. Benchmarking and Comparables

This entails comparing internal costs and performance results with those of other same or similar businesses operating in the same or similar sector. Demonstrating that the price utilized in the transaction is reasonable and in line with market rates, is the ultimate objective.

5. TP Documentation

Multinational companies with a stipulated high turnover must prepare two key files each year:

• Local File:Covers the transactions and pricing structure within the country
• Master File:Covers the group’s global business information along with its pricing policies

These documents are needed to prove compliance during audits, and the Federal Tax Authority (FTA) can ask for these documents from the taxpayer at any time. Prepare all important documentation beforehand with the help of TP consultants in the UAE.

TP Structure: Special Focus Areas

1. Custom Design for Each Group

Every business is different. Hence, a “copy-paste” model would not work. The pricing structure must reflect the entity’s size, its market, its operations and its long-term goals. For example, a tech company with software licenses would need a different setup as compared with a manufacturing firm.

2. Tax-Efficient Structures

A well-thought-out and smart TP structure can reduce overall tax costs. Using legal tax breaks and choosing the right entity location can lower the effective tax rate. This, in turn, can save valuable money and resources for the taxpayer, without breaking any laws.

3. Handling Complex Transactions

Some deals are more difficult to price. These include:

• Use of patents or royalties
• Loans within the group
• Shared services like Human Resources (HR) or Information Technology (IT)

These need expert knowledge to set the correct values vis-à-vis the pricing.

4. Regular Review and Risk Checks

TP is not a one-time task. Business conditions change and so do tax laws. Hence, organizations must:

• Review their TP policies regularly;
• Update documents, if needed; and
• Check reports for errors or risks

This ongoing care helps avoid surprises during TP audits and payment of avoidable fines/penalties.

How can Tax Gian Assist?

A strong TP system is not just helpful; it’s an absolute necessity. It keeps your business safe, saves money and helps avoid trouble with the tax authorities. Tax Gian helps you develop the right approach, refined policies, proper documentation and fair pricing strategies, so that businesses can design a structure that supports long-term, unending success. Our expert TP consultants in Dubai are always at hand to help you. Reach out to us for a discussion; it would be our pleasure to assist you.