Businesses that operate globally may well have a transfer pricing policy in place. These policies serve as an accounting strategy to determine transactional costs across divisions. A transfer pricing policy can also be an effective tax avoidance practice by allocating profits across international parts of the organization.
However, numerous challenges can arise when it comes to these intercompany pricing policies due to their complexity and the potential for illegal or abusive conduct.
Trade mispricing
One of the primary challenges that can arise for transfer pricing policies is an allegation of mispricing. There are various offenses that fall under the umbrella of trade mispricing. Such actions can include:
- Misstating valuations
- Pricing that deviates from the arm’s length pricing standard
- Inaccurate or missing documentation
- Falsification of transactional information between countries, also called trade misinvoicing
Parties that engage in these and other prohibited actions can be accused of trade mispricing.
That said, transfer pricing itself is not illegal. But there is a difference between legitimate strategies to minimize tax obligations and deliberately attempting to deceive authorities or manipulate markets. Parties accused of the latter can face hefty penalties and fines.
Protecting your business from serious tax violations
There are a number of strategies to avoid misconduct in transfer pricing policies and practices. This article points out five ways to minimize the risk of non-compliance, which includes:
- Understanding pricing principles in various countries
- Examining your company’s intercompany pricing policies in each country
- Creating and retaining comprehensive transactional documentation
- Reviewing your transfer pricing policy every year
- Having financial and legal resources in place to respond quickly to audits
Without these efforts, companies could make costly mistakes and ill-advised operational decisions that expose their business to serious legal implications.
That said, rarely are these matters straightforward. Between the volatility of global regulations and the complexity of transfer pricing, it can be difficult to see exactly where – and if – a corporation engaged in misconduct. As such, having the help of lawyers and financial professionals will be crucial for international entities.