Potential Transfer Pricing Pitfalls Multinational Corporations Can Avoid – Part 1

Learning Centre • Potential Transfer Pricing Pitfalls Multinational Corporations Can Avoid – Part 1

Potential Transfer Pricing Pitfalls Multinational Corporations Can Avoid – Part 1

Introduction:

As businesses leap over geographical and economic barriers, how do they manage their international tax obligations? Different countries have different tax laws. In some countries, businesses must pay taxes at the place where the income is earned, while in other countries, businesses must pay taxes where the income is received. There are also differences in tax rates. International tax obligations, including transfer pricing, are a critical piece in managing a global business and should not be overlooked. MNEs are faced with unique challenges when aligning their transfer pricing policies across jurisdictions. They need to ensure that the transfer pricing strategies that they are applying are in accordance with all the local taxation policies and are only applied to the extent agreed in mutual agreement with the relevant authorities. The dynamic business landscape and growing pressure to maintain the trend and profitability make it increasingly difficult to align the alignment over the authorities.

1. Deviation between contractual arrangement and business operations augmentation services

Analysis of an intercompany transaction from a transfer pricing standpoint, by definition, is based upon dissimilar specific, in which the contractual agreement sets out the roles and responsibilities, allocation of risks, terms, and obligations of each party to the contract. This is the preferred approach endorsed by the OECD in its Transfer Pricing Guidelines.

Multinational enterprises (MNEs) can avoid the tax authorities' scrutiny by ensuring that the business's actual conduct continues to comply with the contractual arrangement while conducting the transfer pricing analysis. Contractual arrangements are a key component of the transfer pricing analysis. Any deviation from the contractual arrangements and the party's actual conduct can be a red flag to trigger a further investigation to substantiate the arm’s length nature of the transactions.

2. A business model proved unprofitable in short-term perspective

The market landscape is dynamic and competitive. Business models are rapidly evolving, accelerated by technological advancements and changing consumer needs. Expansion often takes precedence over strategy and incremental growth. Without a clear strategy, especially in the digital age, MNEs struggle to grow and are at risk of losing market share to agile competitors. A sound business model works not only today, but also in the long-term. Going to market with a weak business model that is not profitable can make your business lose out on profits in the long run.

Certain types of intangible assets cannot be moved between countries. Moving intangible property from one jurisdiction to another, or converting a limited risk distributor to a full-fledged distributor as the business progresses may entail various challenges from a tax and transfer pricing perspective. MNEs must ideally chalk out a well-thought-out business model that takes these factors into account.

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