If you are operating a business across borders, you know that international business is rewarding but complex. One of the key areas you’ll need to manage carefully is transfer pricing, which is the practice of setting prices for goods, services or intangible assets sold between entities within the same company. Getting this right is crucial to avoid extra costs and tax disputes.
The complexity of transfer pricing
Transfer pricing isn’t just about picking a number. It is a complex business process governed by rules that aim to prevent companies from avoiding taxes.
Why is it so complicated? For starters, transfer pricing must reflect what independent companies would charge in the open market, known as the “arm’s length principle.” Secondly, different countries have their own tax laws, which can lead to disagreements over which country taxes what profits. Lastly, the types of transactions, such as sharing intellectual property or providing services, can greatly vary, adding layers of complexity.
Can we prevent disputes in the first place?
As a savvy business owner, you likely want to prevent disputes before they start. When it comes to transfer pricing, you can set a solid foundation with the following measures:
- Work with tax and transfer pricing advisors. They can help you understand the rules and set appropriate prices.
- If the Canada Revenue Agency questions your tax structures, get a fresh perspective on your pricing strategies. Doing so with an attorney assures the review is done in a privileged manner.
- Keep comprehensive, accurate records. Retaining documentation can provide evidence to the Canada Revenue Agency (CRA) that your company’s transfer pricing is reasonable and compliant.
Taking these steps can reduce the risk of disruptive disputes and penalties.
Taking transfer pricing matters seriously
Transfer pricing is a sophisticated aspect of international business. It requires careful attention and knowledgeable guidance. By understanding the intricacies, working with professionals and maintaining detailed documentation, you can navigate these legal waters successfully.
Remember, the cost of getting transfer pricing wrong can be high, so invest the time and resources now to save yourself headaches later.