Georg Berssenbrügge, Managing Director of InterGest Germany GmbH since 2017, has been a tax consultant since 2003. He is very familiar with the challenges in cross-border business transactions that his clients have to overcome on a daily basis, and the topic of transfer pricing in particular often occupies him: "Correctly calculating and documenting transfer prices between parent companies and foreign subsidiaries has become a Herculean task for many companies, which not only holds many pitfalls, but also ties up enormous resources."
Today he answers some important questions about this:
WHAT ARE TRANSFER PRICES?
Transfer prices are the prices charged between individual affiliated companies based in different countries for intra-group transactions (e.g. deliveries of goods and services). In simpler terms, transfer prices are internal prices used for transactions between departments and divisions of a company.
In English, they are referred to as "transfer prices", which is why they are also sometimes referred to as "transfer pricing" in German. This also refers to the price of goods or services that are exchanged within a company or group.
IS TRANSFER PRICING IMPORTANT?
Transfer prices are actually very important! They play a decisive role in the cost and performance accounting of companies: The performance of different departments should be evaluated and compared in a fair and consistent manner. Through this evaluation, transfer prices are also a mechanism for controlling the allocation of resources throughout the company.
However, the calculation of internal transfer prices can be complex, especially in multinational groups with many different business units and divisions.
Careful consideration of corporate strategy, business model, competitive landscape and regulatory requirements is therefore necessary to establish an effective and fair system of internal transfer pricing.
WHY DO YOU HAVE TO DOCUMENT TRANSFER PRICES?
Quite simply because it is mandatory for internationally active companies above a certain size. In this documentation, they must disclose their business relationships with related parties or (subsidiary) companies and report them to the tax authorities. This serves to verify the appropriateness of the transfer or transaction prices within the group of companies that are used for cross-border transactions between affiliated companies.
The transfer pricing documentation usually consists of two parts: the master documentation and the country documentation. The master documentation contains information on the business activities, the organisational structure, the transfer pricing strategy and the financial position of the entire group of companies.
The country documentation contains information on the local business transactions, the functional and risk analysis, the transfer pricing method and the pricing of the individual affiliated companies.
Transfer pricing documentation is required by law in many countries and must comply with the OECD guidelines. In Germany, the Transfer Pricing Documentation Act (VPDG) has been in force since 1 January 2017. It obliges companies with a group turnover of more than 750 million euros to submit country-by-country reporting (CbCR), which provides an overview of the global distribution of the group's income, taxes and business activities.
WHAT TYPES OF TRANSFER PRICING METHODS ARE THERE?
There are various methods for determining transfer prices, each with its own advantages and disadvantages, requirements and challenges:
The price comparison method compares the prices agreed between affiliated companies with the prices paid between independent companies for comparable transactions.
The resale price method compares the profit margin realised by a related company on the resale of goods to independent customers with the profit margin realised by independent resellers on comparable goods.
The cost plus method compares the profit margin that an affiliated company adds to its costs when it supplies goods, services or intangible assets to another affiliated company with the profit margin that independent suppliers add for comparable transactions.
The selection of the appropriate transfer pricing method should be preceded by a thorough analysis and assessment of the company's specific requirements and objectives.
WHAT CONSEQUENCES CAN AN INCORRECT DETERMINATION OF TRANSFER PRICES HAVE?
As there is no standardised regulation on how transfer prices are to be determined, companies and groups must provide the relevant tax authorities with a precise breakdown of how they arrived at their transfer prices. This is intended to prevent tax evasion and can, under certain circumstances, result in considerable additional tax payments due to shifted profits.
WHEN DO YOU HAVE TO SUBMIT YOUR TRANSFER PRICING DOCUMENTATION?
We've seen it before: the tax office requests transfer pricing documentation and sets a very short deadline for this. This is standard practice because the relevant documents should actually - and this is precisely where the problem lies - be available at any time. If they are only produced at the time of the request, a hectic rush ensues and it is rarely possible to fulfil the request. There is a risk of late payments and this creates pressure that could actually be avoided if the transfer pricing documentation is properly prepared and regularly checked.
We are, of course, always happy to provide our clients with advice and assistance!
HOW DO TRANSFER PRICES INFLUENCE THE TAX STRUCTURE OF A COMPANY?
Tax-saving models are becoming more difficult or more complex, as transfer prices are calculated for the exchange of goods and services between profit centres of a company.
Nevertheless, transfer prices can also be used to minimise taxes within a group to which several companies belong. They allow profits to be shifted from one company to another. This is mainly utilised by groups that have affiliated companies in different countries.
However, as the tax authorities are of course well aware that companies like to use transfer pricing to shift profits and thus reduce taxes, they take a very close look at the documentation. This makes it all the more important to place transfer prices at the centre of internal discussions within a company and to document them in an extremely transparent manner.
We are also often asked by our clients to support them in this.
HOW CAN COMPANIES ENSURE THAT THEIR TRANSFER PRICING COMPLIES WITH THE REQUIREMENTS OF THE OECD GUIDELINES?
From experience, we recommend using competent external service providers for the documentation of transfer prices or at least for their review. This is precisely because the topic is one that is often neglected as it is time-consuming and complex.
Not only are we, as a recognised tax consultancy, available for this, but also our global network of InterGest partners who know the regulations in the respective country and can therefore provide good advice
We support companies jointly and holistically, from the parent company to the foreign subsidiaries and back again. In international business, topics such as transfer pricing are particularly important and require expertise and experience.
Did you already know: Mr Colleselli, tax consultant, will join the InterGest Germany team as a new managing director on 1 January 2024 and will be available as a specialist for cross-border tax issues.
