Best Practices suggest that transfer Pricing should be approached as a strategic management project. As businesses grow globally, they should review their business models to align with their international footprint. Below, we gather seven examples of best practice for managing transfer pricing effectively.
1. Formation of a Dedicated Transfer Pricing Team
Best practices suggest Companies to appoint a person or create a team responsible for overseeing transfer pricing matters. Depending on the company's size, the team may consist of various employees, preferably led by the CFO. With transfer pricing affecting different departments—tax, accounting, international trade, finance, legal, and operations—the involvement of an external advisor with specialized expertise is highly beneficial.
2. Review of the Supply Chain and Value Drivers
The next example of best practice suggests conducting a thorough supply chain and value driver analysis, including implications for intercompany transactions. The purpose is to align the company's objectives with an efficient transfer pricing structure, pinpointing which entities create economic and legal value and assessing the associated risks and entity functions. Understanding the company's business model, value drivers, and supply chain enables the identification of both explicit and implicit intercompany transactions.
3. Development of a Transfer Pricing Policy
Formulating a transfer pricing policy using established methods in line with both local and international standards, such as the OECD guidelines, is another example of a best practice. This policy ought to maintain the arm's length standard and be designed to support itself, thereby facilitating upcoming documentation efforts.
4. Drafting Intercompany Agreements
The fourth best practice suggests assembling supplementary information or documents supporting the transfer pricing policy. Essential documents include intercompany agreements that detail roles, obligations, and pricing methods for all participating entities.
5. Implementation of Operational Transfer Pricing
The fifth best practice that companies should consider is the execution of transaction pricing and accounting procedures, or operational transfer pricing. This relies on cross-functional teams and technological tools for accurate pricing, transaction tracking, and related financial entries. This phase has been overseen in the past and has generated significant inconsistencies between the transfer pricing policy and the transfer pricing documentation.
6. Complying with Documentation Requirements
The sixth best practice should involve developing a detailed strategy to address all documentary requirements associated with intercompany transactions. It is recommended by industry’s best practices to centralize such tasks that include the generation of transfer pricing documentation and yearly filings. While many firms engage external consultants for these tasks, it is highly recommended to maintain robust collaboration between company leadership and those advisors in a centralized fashion.
7. Establishing a Corporate transfer pricing Mechanism
Finally, the seventh best practices example advises the creation and upkeep of a corporate transfer pricing mechanism. This system should oversee adherence, foresee intercompany dealings, and account for possible contentious matters. Decision-making within this framework ought to align with business strategy, the best interests of stakeholders, the arm's length standard, and meet regulatory obligations.
As indicated, it is highly recommended for the transfer pricing to undergo continuous monitoring and expertise assessment to maintain its efficacy and compliance with regulatory requirements. Therefore, companies should consider retaining the services of a specialized consultant to assist them with their transfer pricing endeavors.
The information provided in this article is meant for general information purposes only and should not be taken as professional advice. It does not necessarily represent the views of the authors, facilitators, or TP CUBIT. While all attempts have been made to verify the accuracy of the information at the time of publication, the author, facilitator, and TP CUBIT are not responsible for any losses or liability that might arise from using or relying on the contents of this article.
