Importance of Transfer Pricing in Multinational Companies
Have you ever thought about a transfer pricing system? As the process trend continues, transfer pricing problems still be a key focus for multinational companies. Establishing transfer pricing tax ways permits multinational companies to optimize operations, whereas at an equivalent time ensuring compliance with tax laws and minimizing the prospect of acquisition price penalties. Multinational companies have many tools to shift profits out of high into low tax regions. These embody the selection to finance associates in a subsidiary with debt or equity, the structure type to possess the subsidiary or to interact in an exceedingly joint-venture with an area firm, or the payment of management fees or royalties between the parent company and its subsidiaries. Planning transfer pricing systems might be a central instrument for control as results of transfer costs that are often set to accomplish bound objectives. These objectives are a unit seemingly to be conflicting, that creates it laborious for the companies to construct an associate best model for transfer pricing.
What is Transfer Pricing?
Transfer pricing refers to the prices of goods and services that are exchanged between commonly controlled legal entities within an enterprise. Multinational corporations use transfer pricing as a method of allocating profits among its various subsidiaries within the organization. Entities under common control controlled by a single parent corporation commonly use this. For instance, if a subsidiary company A sells goods to the holding company X, the price charged is referred to as transfer price and the setting is called transfer pricing.
Advantages of Transfer Pricing
- To reduce the effect of tax accounting in different countries by booking more profits for goods and services produced in countries
- To lower expenditure on interrelated transactions by avoiding tariffs on goods and services
Some objectives can encourage the managers to charge a far better worth, whereas others can promote a lower cost. This forces managers to make trade-offs since no single transfer pricing methodology serves all functions. As a result, a quite simple fraction of world trade merchandise, services and intangible assets happen between companies that are a unit related to one another, as an example, between two subsidiaries of multinational companies. Trade between connected companies is termed intra-firm trade.
Transfer pricing is the establishment of a price for the exchange of products and services between two connected legal entities or “controlled entities” at intervals. Once two unrelated corporations trade with each other by genuinely negotiating the worth for the services or product within the open market this establishes the worth for the dealings. This arm’s length of commerce worth is usually thought of to be acceptable for tax functions in reference to the transactions between connected parties.
Domestic Transfer Pricing
Domestic transfer pricing is principal regarding economic allocations of resources, it's regarding finding the optimum trade-off between prices and revenues and also the performance analysis between divisions is extremely necessary. Therefore, the aim is to increase the profit for the firm as a whole. Once intra-firm trade crosses national borders, it's mentioned as international transfer pricing, or simply transfer pricing. However, an MNC must manage its overseas transactions in an exceedingly world characterised by
- International tax rates
- Interchange rates
- Governmental laws
- Currency manipulation
- Economic and social issues
Let’s have a look with an example
The following table shows the intra transactions between two divisions of a company:
Division A (AED)
Division B (AED)
Here Division A produces goods for a cost of AED 3000, and these are transferred to Division B for AED 5000. Division B buys the goods at AED 5000, incurs own costs of AED 2000, and then sells to outside customers for AED 9000.
As things stand, each division makes a profit of AED 2000/unit, and the group will make a profit of AED 4000/unit. You can calculate this either by simply adding the two divisional profits together (AED 2000 + AED 2000 = AED 4000) or subtracting both own costs from final revenue (AED 9000 – AED 3000 – AED 2000 = AED 4000).
From the above, for every AED 100 increase in the transfer price, Division A will make AED100 more profit, and Division B will make AED 100 less. Therefore, the group will make the same profit, but these changing profits can result in each division making different decisions.
Transfer pricing in the UAE?
As per the UAE reporting requirements the UAE entities that are resident for tax purposes and are members of a multinational group having annual consolidated revenues of AED 3.15 billion or more threshold of EUR 750 million in the preceding year. The following compliances to be done by qualifying entities resident for tax purposes in the UAE:
- A notification has to be filled to the MoF by the ultimate parent entity/reporting entity and constituent entities in the UAE by the end of the financial year
- Filing a CbC (Country by Country) report by the Ultimate Parent Entity/SPE (if the UAE entity is appointed as an SPE by the group) with the MoF within 12 months from the end of the year
How CDA can help you with Transfer Pricing?
CDA team can help you:
- To reduce the tax burdens on business transactions
- To perceive international tax developments, have an impact on their operations
- Optimize the overall profits and revenues for the business as a whole
- Created applicable transfer worth which will be important in account a legitimate live of divisional profit for performance analysis functions
- Create more-effective foreign investment selections
- Increase tax and operational advantages ensuing from business restructuring
- Develop sound policies alleged to manage or avoid changes and penalties
You may also read, How a Tax Consultant Can Save Business Money
CDA provides various business services that include CFO Services, Auditing Services, Accounting & Bookkeeping Services, Accounting Software Services and Payroll Accounting Services.
Hope you got a clear idea of the importance of transfer pricing in multinational companies. If you have any queries or need any of our services, feel good to contact us. Our expert will call you back immediately and will offer you a one-hour free consultation.