Transfer pricing: Are you maximizing your opportunities?

Transfer pricing analysis can support strategic decision making, operational efficiency, and sustainable tax planning

Transfer pricing helps an organization analyze and document transactions between related parties for consistency with the arm’s-length principle, enabled with people, process, and technology capabilities.

Equally pertinent, a transfer pricing analysis (also known as a transfer pricing study) enables corporations that do business with related parties in multiple tax jurisdictions to identify and create opportunities that increase shareholder value. A robust transfer pricing analysis supports the corporation in making strategic business decisions, improving operational efficiency, and structuring optimal tax arrangements with respect to its controlled group of companies. In addition, a proper transfer pricing analysis provides reliable pricing data and evaluates a company against comparable companies in the same industry across relevant geographic markets.

Supporting strategic business decisions

A company operating in multiple tax jurisdictions needs to make strategic decisions about which of its controlled entities are to:

• Carry out what business activities (e.g., R&D, manufacturing, distribution, etc.),
• Assume or share the corresponding risks
• Own which assets, both tangible and intangible

These decisions impact the company’s allocation of costs and profits which, in turn, have material tax and business implications. A transfer pricing analysis can support management in making informed decisions, taking into account the company’s value chain, risk allocation and tax consequences.

For example, we assisted a U.S. pharmaceutical company, that was in a Phase-3 clinical trial for the U.S. Food and Drug Administration’s (FDA) New Drug Application, as the company was planning to set up a manufacturing entity in Ireland in anticipation of commencing sales in the U.S.

Specifically, the company’s management team wanted to assess the tax costs and benefits of the company’s characterization as an entrepreneurial principal as compared with as a limited-risk distributor.

Using 15-year sales and expense projections, we performed a transfer pricing analysis to structure the internal drug purchase price payable by the U.S. company to the Irish entity and the royalty rate for embedded intellectual property (IP) under each business scenario and in accordance with both the U.S. and the Irish regulations. Management used results from the transfer pricing analysis to make strategic decisions regarding allocation of people, functions, risks and IP between the U.S. company and Irish entity.

The intercompany purchase price and the royalty rate were consistent with each other, reflected the arm’s-length returns to the aforementioned allocations, and enabled the U.S. company to minimize its consolidated world-wide tax leakages.

Improving operational efficiency

A transfer pricing analysis helps companies to efficiently manage their transfer pricing data and improve the integrity of intercompany accounts with a focus on enhancing the tax and finance processes and governance.

At Kaufman Rossin, our transfer pricing team uses data-driven analyses to provide strategic insights that help companies improve processes, increase quality, reduce audit risk and identify opportunities.

For example, we assisted a New York-based private equity (PE) firm in setting up a U.S. company to originate deals and manage existing portfolio companies, domestically and internationally, held in various limited partnerships (LPs).

To compute the returns of each deal and portfolio company investment, and to gauge performance against competitors, the PE firm’s management team needed to confirm that expenses incurred by the portfolio management company are appropriately allocated and assigned to the relevant deal and portfolio company that benefits from services performed by the company.

Using transfer pricing methodologies, we developed a cost allocation model that charges out the portfolio management company’s expenses to the corresponding LPs, in accordance with the U.S. and Organisation for Economic Co-operation and Development (OECD) transfer pricing regulations.

The cost allocation model enabled the private equity firm to: support planning and budgeting activities, identify operational areas of improvement, and quantify resources needed for the portfolio management company on an ongoing basis, as well as to efficiently produce tax and finance support around each activity as required.

Structuring sustainable tax arrangements

Companies often allocate too much revenue or too little costs to related entities in higher-tax jurisdictions, triggering tax leakages that are avoidable. A transfer pricing analysis can help an organization develop economically supportable transfer pricing policies and execute sustainable tax planning with effective tax rate benefits aligned with the organization’s evolving business models.

For example, we assisted a Chilean multinational investment company whose U.S. broker-dealer subsidiary was subject to the U.S. Base Erosion and Anti-Abuse (BEAT) tax exposures.

To minimize BEAT tax exposures, we performed a transfer pricing analysis to restructure the legacy commission and profit-sharing arrangement between the U.S. broker-dealer and Chilean investment company with respect to cross-border equity and bond sales origination and trade execution.

The in-depth assessment of value drivers resulting from the transfer pricing analysis helped both entities to reallocate relevant business activities and risks that were consistent with the arm’s-length intercompany commission and profit-sharing arrangement, while minimizing BEAT tax leakages.

In addition, applying the aforementioned transfer pricing framework, the Chilean investment company subsequently negotiated and streamlined its remaining legacy multi-party contractual arrangements and trade flows amongst affiliates and third-parties across the Americas to improve operational efficiency and risk management.

Increase shareholder value through transfer pricing

Transfer pricing issues continue to command attention from tax authorities and corporate tax executives due to the frequency, complexity and subjectivity of transfer pricing determinations, the involvement of multiple tax jurisdictions, and the strict reporting requirements and potential penalties.

A robust transfer pricing analysis incorporates an understanding of the company’s markets, the company’s place in each market, what similar companies are doing, and the economics and value in multiple tax jurisdictions.

Contact a member of Kaufman Rossin’s transfer pricing team to learn more about how your company could benefit from a transfer pricing study or related services that can help you mitigate tax audit risks and increase shareholder values.