How can Transfer Pricing Planning be Strategic?
Transfer pricing compliance has become critical for Multinational Enterprises (MNEs) having cross-border transactions with related parties located in multiple tax jurisdictions. This is not an easy process and often necessitates outsourcing the expertise of transfer pricing consultants.
Most importantly, the companies must strategically plan their transfer pricing policies. This planning must be done to balance your business goals with regulatory compliance, mitigation of tax risks, and improvement of operational efficiency.
This blog will help you with tips to make your transfer pricing planning more strategic:
Business strategy alignment
MNE Groups must align their transfer pricing policies with the wider business strategies. Key factors to consider include value chain positioning, market presence, and competitive advantages.
Value creation analysis
A detailed analysis is necessary to identify the areas where value is created. This will help to determine the entities that contribute most to the Group’s overall profitability and help you allocate profits appropriately.
Risk assessment
Risk exposure in different jurisdictions must be assessed to identify and evaluate tax and legal risks related to transfer pricing. After the assessment, MNE Groups must make necessary adjustments in their policies to reduce exposure to transfer pricing controversies and disputes.
Functional analysis
Assess the functions, assets, and risks associated with each entity within the group. The role of each entity must be clearly defined and make sure transfer pricing reflects the value added by each entity’s contributions.
Transfer pricing methods
MNE Group must select the most appropriate transfer pricing method that reflects their operations and available data. Factors to consider while selecting the most suitable transfer pricing method include industry practices, comparability data, and regulatory requirements. The transfer pricing methods are:
- Traditional Transaction Methods: Comparable Uncontrollable Pricing Method (CUP), The Resale Price Method, The Cost Plus Method
- Transactional Profit Methods: Comparable Profits Method, Profit Split Method
Documenting policies
Your transfer pricing policy or policies must be documented as part of the planning. The documentation must outline the rationale behind your pricing decisions, market analyses, and compliance with the UAE transfer pricing regulations.
Advance Pricing Agreements
Engaging Advance Pricing Agreements (APAs) with The Federal Tax Authority (FTA) is necessary to establish agreed-upon transfer pricing methodologies.
Drafting robust APAs is essential for certainty, reducing disputes, and aligning tax planning with business strategies.
Innovation and intangibles
Strategic planning is required for transfer pricing involving intangibles such as patents, trademarks, copyrights, know-how and trade secrets. The key things to do regarding intangibles include:
- Identifying intangibles for transfer pricing
- Valuing and transferring ownership of intangibles
- The rights to intangibles’ returns
The intangibles must be valued based on contributions, risks, and market conditions.
Intercompany agreements
MNEs should draft Intercompany agreements (ICAs) that set out the terms and conditions of transactions. These ICAs must align with the economic substance of the transactions and substantiate the entity’s transfer pricing policies. UAE companies can hire transfer pricing advisers to draft effective ICAs.
Consistency and governance
Consistent transfer pricing policies must be applied to maintain consistency across tax jurisdictions. By implementing robust governance structures, Groups can oversee compliance, ensuring policies are followed across the organization.
Tax authority relationships
Companies must try to build a good relationship with the authorities such as the FTA. Engaging in proactive discussions will help the companies to address concerns and clarify their transfer pricing policies.
Continuous monitoring and adjustments
It is critical to regularly monitor the effectiveness of your transfer pricing policies and make necessary adjustments. Revisions to transfer pricing policies can be caused due to changes in business models, market conditions, or regulatory environments. Seeking the help of transfer pricing consultants can aid the UAE companies in this aspect.
Tax Gian can Assist in Transfer Pricing Planning.
Strategic transfer pricing planning is critical for MNEs to achieve both regulatory compliance and operational efficiency. Tax Gian, a brand of Jitendra Tax Consultants (JTC), is a leading transfer-pricing consultant in the UAE. We have a team of experienced transfer pricing advisers who can offer comprehensive support for you.
Tax Gian can assist in preparing accurate transfer pricing documentation, drafting robust Advance Pricing Agreements (APAs), and ensuring consistent application of policies across jurisdictions. With our guidance, you can navigate the complexities of transfer pricing regulations, maintain transparency with tax authorities like the FTA, and mitigate potential tax risks. Choose Tax Gian as your trusted partner for strategic transfer pricing planning to stay compliant and maximize profitability.
