Transfer prices are important part of the business of multinational organisations. It is not an obstacle, it is an opportunity to structure the business fairly and tax efficiently.
We consider transfer prices as a part of strategic planning.
Our experience in transfer pricing covers well above 10 years of describing and shaping economic relations of Polish subsidiaries with their European or US headquarters – or the other way round.
We also wrote some articles and taught trainees on some courses. Now we dare to say:
transfer prices require only one thing from a taxpayer: a common sense
The fiscal authorities may demand tax documentation of transfer prices within 7 days upon request. The tax documentation is supposed to contain 6 following parts:
1) description of functions to be performed by entities engaged in the transaction (taking into account the assets used and the risks taken);
2) description of all anticipated costs of the transaction, as well as the payment terms;
3) method of calculating profits and pricing of the object of the transaction (the Comparable Uncontrolled Price [CUP] method is generally deemed to be first choice);
4) description of business strategy and other actions hereunder – in case the value of the transaction was affected by the strategy adopted by the entity;
5) indication of other factors influencing the value of transaction;
6) description of performance related benefits expected by the entity obliged to make out the documentation – in case of agreement concerning intangible transactions.
If a tax payer fails to present the TPD within 7 days from request he may face a risk of 50% penal income tax rate (versus 19% standard rate) to be applied to any extra income assessed during the tax inspection. This is as far as the tax book goes.
If a tax payer fails to present the TPD within 7 days from request he may face a risk of 50% penal income tax rate (versus 19% standard rate) to be applied to any extra income assessed during the tax inspection. This is as far as the tax book goes.
However the most important questions are between the lines. They are:
Are the services really being performed
How are they adapted to the needs and requirements of the structure of the Polish entity?
Is a verification process in place?
Do you know what you are paying for? Does the services contribute to your business?
Would unrelated parties enter such transaction?
Are you aware how the price of the transaction was determined?
If the tax documentation of your transactions does not provide a fair answer to these questions you may not have reached a safe tax haven. In the background a suspicion hangs: perhaps the transaction serves solely the purpose of transfer of the profit? If this question seems to be to blunt you may ask yourself if your profits would be higher without this transaction.
It is quite obvious that a tax inspector who examines your transfer pricing documentation is nowadays an intelligent and educated person. While evaluating the prices in the mutual financial settlements he is not impressed by the appearances: the description of all known price setting methods, the graphical layout or the thickness of the book
You must be able to present:
- what you pay for,
- do you really need it
- and if it is worth as much, as you pay for it.
During our work we focus on answering these essential questions.
When to make the tax documentation?
Time is critical
There is only one right moment to make the documentation. When you decide about the transaction. Whatever is made later is an addendum or enhancement. The cost of making the tax documentation at later stage increases while the quality decreases. Still, most of the projects take place months or years after the transaction was made and its conditions were agreed. Some information may be missing, some later facts interfere with original set up. Persons involved might have changed etc. If you decide to wait with tax documentation until you are asked by tax authorities you give yourself only 7 days.
In many cases tax documentation is made after tax year and filled with the numbers. It is a good idea, however it is not a necessity.
Typical errors or problems with transfer prices and its documentation:
- The prices are set at the same level by the HQ without consideration of local conditions. Consequently the tax authorities of the local markets are able to make individual assessment.
- No reference available to determine why this price level was determined.
- Cost plus method. If the costs are not precisely controlled and justified the price may end sky high.
- No evidence of received services. This is usually a sign that the transaction was not executed partly or entirely.
- No need for management services, paid for. This is usually a sign of transfer of dividend under coverage of service charges.
Where does the HMDP competitive advantage start?
- We consider whether the transaction is on fair terms and present it in one page report.
- We take to consideration both parties of the transaction so the document which you shall use will not cause damage to the other party.
- If requested, we investigate the requirements of the tax administration of the other country concerned, so one documentation may serve both ends,
- We will perform an analysis of arm’s length terms. With the use of the financial databases of Bureau Van Dijk- AMADEUS and ORBIS we are able to compare gross margins, net margins, return on equity or return on assets of the enterprises on the specific market. By a well-documented statistical search we obtain the multi-year comparable data which is used for comparison with your results. The comprehensive benchmarking section makes the transfer pricing documentation richer and more reliable.
- The same tools are used by the Ministry of Finance so once you provide them with the analysis it will be respected, as their own research should lead to the same or nearly same results.
- We shall provide full coverage of transfer pricing tax audit whenever it occurs at a fraction of a regular rate.
