How to Structure Intragroup Transactions to Minimize Risks of Transfer Pricing
In the global economy, multinational companies operate across geographic borders and are involved in an intricate web of intergroup transactions. Although these transactions may seem routine, tax regulators view them more critically. Improperly structured intercompany transactions may raise red flags and result in audits, which may require prolonged litigation, penalties, and significant adjustments.
So, how do foreign companies ensure the right balance between operational efficiency and regulatory compliance? Smart structuring of intercompany transactions. This blog explores strategies to smartly structure intercompany transactions that are at an arm’s length and resilient to scrutiny. This helps companies to mitigate risks without compromising their overall global strategy.
Common Challenges of Transfer Pricing
- Chargeability and OECD Guidelines
A fundamental issue with transfer pricing rules is accurately distinguishing between chargeable and non-chargeable intercompany transactions. Some services, like human resources, research and development, and IT support, have commercial or economic benefits to the receiving company. The OECD guidelines suggest applying the benefit and the independent entity test to determine chargeability and the legitimacy of the transactions.
- Litigation and Regulatory Challenges
Demonstrating commercial and economic benefits is a never-ending struggle. Disputes related to insufficient documentation, unclear cost allocations, and benefit-test failures are common with intercompany transactions. Often, these disputes result in litigation, and sometimes the authorities may question the legitimacy of the transactions, resulting in prolonged and expensive delays.
Tips to Minimize Transfer Pricing Risks
- Preventive Measures
- Regular Audits: Periodically auditing intercompany transactions will help organizations identify possible risks and ensure compliance with the transfer pricing regulations
- Benchmarking Studies: Regular updates of benchmarking studies and comparability ensure the fees are in line with market conditions, and are more important in high-value or specialized transactions
- Internal Controls
- Review Service Agreements: Ensure all agreements are updated and reflect the services accurately
- Monitor Cost Allocation: Verify cost allocations are justified and consistent based on their functionality, asset usage, and assumed risks
- Awareness and Training: Regular training must be provided to the finance and tax teams to ensure complete awareness of the transfer pricing documentation requirements and standards
- Documentation and Compliance
The OECD and BEPS guidelines heavily emphasize maintaining accurate and detailed documentation. These should clearly outline the benefits of such transactions, the cost allocation method used, and the application of the arm’s length principle. It is recommended to maintain detailed records for the services provided, which include contracts, cost allocation methods, and price justifications. Moreover, the documents should be easily accessible and regularly updated.
Transfer pricing is one of the most important and complex corporate tax planning strategies associated with intercompany transactions. Knowing how and when to apply the relevant methods, preparing the report, and ensuring accurate and detailed documentation helps companies navigate the intricate maze of transfer pricing regulations in India.
An experienced professional service provider can simplify this process by preparing the TP report, conducting the benchmarking and economic analysis, risk assessment and dispute resolution, and complying with the audit and regulatory requirements.
To know more about how Greenvissage can simplify intercompany transactions, reach out to us; call on +91 8237857853 or drop us a mail at info@greenvissage.com.
