Internal price (also known as transfer price) is the price charged between different departments of a company or between different companies in a group for internally exchanged goods and services (e.g. delivery of goods, royalties, loans, provision of employees). It plays an important role in tax law since it can be used to shift profits to low-tax regions (e.g. due to varying trade tax rates) or countries (low tax regions, tax havens). Therefore, there are complex regulations to prevent misuse. At the international level, e.g. the OECD has concluded an action plan against BEPS (Base Erosion and Profit Shifting), which has been or should be implemented within local law by many countries.
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Transfer pricing in the international tax law
Transfer pricing: The conditions must correspond to the arm’s length principle
Dealing at arm’s length is the basic principle in this process; this means that the appropriate transfer price is the price, which an independent third-party would have also paid.
For its member states, the OECD stipulates that any cross-border services and supplies must be acknowledged for tax purposes only if the conditions for these services and supplies correspond to the arm’s length principle.
If this condition is not fulfilled, the tax authorities are authorized to increase the profits at the expense of the taxpayer. This is applicable irrespective of the size of the company or the flows of goods or services within the group.
In order to avoid drawbacks, all groups or companies with supplies and services between various units should take into account that all the supplies or services within the group are properly remunerated.
For this purpose, the conditions of the parties involved should be negotiated at arm’s length and put down in a written agreement.
Transfer pricing documentation, documentation of facts and arm’s length analysis
If a German company or a German permanent establishment is involved and if the cross-border services exceed a value of € 600,000 p.a. or the supplies exceed a value of € 6 million p.a, a transfer pricing documentation must be presented, which corresponds to the strict and detailed regulations. Companies, which have not fulfilled this obligation, must expect to be charged with severe penalties of up to € 1 million and must additionally refute the potentially very high profit estimation of the tax office. Companies, which submit a transfer pricing documentation according to the standard norms, must be able to prove to the tax office that the transfer prices are correct.
We will gladly do the work of preparing a transfer pricing documentation for you. This includes documentation of facts (who in the group has which relations with whom and to what extent) and an arm’s length documentation (if the selected transfer prices correspond to the prices which the third-party would have agreed to). The following transfer pricing methods are taken into consideration:
Comparable Uncontrolled Price method (CUP)
Resale price method
Cost plus method
Profit split method
Transactional Net Margin Method (TNMM)
Depending on the selected transfer pricing method, the different proof has to be provided. Since the appropriate external data is not always available, databases are also used from time to time. For this purpose, we use the same database that is also used by the German fiscal authorities. The software is called TP Catalyst by Bureau van Dijk, which is of the world’s leader in providing of company information.
Transfer pricing documentation in preparation of a tax field audit
If you are not sure whether the transfer pricing documentation prepared by you or your consultant complies with the requirements of the financial administration, we will be pleased to review this for you. If something is missing, we will add the missing parts or we will create the documentation completely from scratch. This can save a lot of money, especially when a transfer pricing documentation is created for the first time, the extraordinary transactions have occurred or an audit is announced or is very likely to happen in the future.
If you are uncertain whether a transfer pricing documentation must be prepared or if there is any transfer of function, we will be pleased to check that for you and highlight the possible risks to you. We will also provide you with solutions. The sooner you contact us, the better it is, as some errors cannot be fixed later.
Consult Benefitax as experts, if special tax field auditors for cross-border transactions are called in for foreign matters during tax field audits
In case a specialized auditor for cross-border transactions be called in for an ongoing audit, and should your tax consultant declare that they can now no longer competently advise and support you, or should you notice that your consultant is not well-versed in the field of international tax law, you can surely consult us. Upon request, we handle only the tricky international tax issues and do not interfere in the discussions regarding any other findings and queries of an audit, which your “favorite tax consultant” has under control. Click here for more information regarding audits.