Companies in high-technology industry companies, such as software, semiconductor, and electronics manufacturers share an intractable challenge; understanding and managing risks and opportunities with transfer pricing rules and regulations worldwide.
This serves as a catalyst for executive-level discussion and enterprise improvement. The reason for transfer pricing risk management includes remediation and sustainability to create improvements in the corporate taxation structure.
Globalization often helps high-tech companies view cross-country boundaries as irrelevant. Most taxing authorities zealously guard their respective tax base, as new transfer pricing legislation and rules indicate. Authorities find value in significant revenue opportunities high-technology companies present, and routinely move assets between jurisdictions.
Transfer pricing, legislation and rules are in place globally. Most practitioners usually move assets between jurisdictions in the normal course of adding value for different products. Adherence to compliance requirements heightens interest and the need for awareness of multinational companies and their rules.
A complex subject fraught with real-time constraints, transfer pricing often needs comprehensive discussion at many levels, especially in the boardroom. International taxation laws need a focus on C-suite capabilities. They often neglect such major issues at their own peril.
Organizations usually operate in a reactive fashion, and grapple with a colossal amount of documentation. Business environments have transformed rapidly, especially after the 2008 economic recession and the consequent worldwide debacle. Most transfer pricing operates on an “arms-length” principle.
In simple words, this indicates that the amount charged by one party to another for a given product should be the same as if the parties were not related.
When speed-to-market, cost containment, convergence, and economics form part and parcel of the global agenda, executives have to strategically enhance business value.
Building Transfer Pricing
External stakeholders often require transparency. Investment regulation is largely to protect interests. Most business is unclear about transfer pricing transactions, especially in intangible property, research and development processes, and intercompany service ideas,such as various kinds of head-office as well as different kinds of engineering activity.
Globally consistent practices based on OECD(Organization for Economic Co-Operation and Development) guidelines are still lacking. However, China is ahead of most countries in enforcing transfer management processes.
Complexity is no longer a barrier as transfer pricing analysis has to yield a story which is reasonable, credible, rational, and consistent for a taxing authority which seeks justification for an organization’s cross-border transactions.
Identifying A Value Proposition
Only thorough functional and economic analyses can identify value drivers, risks and company asset location. When companies provide a legitimate story to authorities, along with solid documentation, then the organization can feel reasonably comfortable that its tax needs are being adequately taken care of.
The company’s auditors are also certain that transfer pricing documentation, along with policy and procedures, can streamline effective coordination. Some of the key questions senior management needs to answer include; where the intellectual property is located, does the organization have written policies, intercompany contracts, and transfer pricing structures.
Globally, firms have clearly demarcated transfer pricing structures, and an interaction with taxation regimes of local areas (e.g. customs, VAT, withholding). Most companies have to create a story that is rational, reasonable, compelling, and consistent. Although platitudes are mouthed often, be crystal-clear in what the authorities need to know.
Most vendors, auditing firms, and organizations manufacture their own version of the truth. Despite an established structure in place around the world, there are numerous scams. This clearly underlines the need for creating a comprehensive, complete program.