Common mistakes in TP (and how to avoid them)

Transfer pricing is important - no one needs those fines from tax authorities. The thing is - it is easy to make mistakes in TP!

At iVC, we want to ensure that all of our clients have their Transfer Pricing policies in line with both local and OECD guidelines.

In order to avoid costly errors in your company, we have prepared a short list of common mistakes companies (big and small) make in their Transfer pricing.

Inadequate or inconsistent documentation

A common mistake that companies make is to have inadequate or inconsistent documentation of their transactions and the methods they use for pricing them. Even if there is some documentation, it is often inconsistent between different entities or different countries. This can lead to challenges from the tax authorities, penalties, double taxation, or mistakes in reporting.

How to avoid it:

1. Centralize the TP documentation process across your company to ensure that it's consistent across all entities and jurisdictions.

2. Regularly update your TP policies, in line with the most recent updates to legislation at a local level and in the OECD guidelines.

3. Finally, start thinking about TP early in your company's journey - even if you don't need Local/Master files right now, you will still need them in the future! Make sure that you are ready for it, that you have policies in place and you can focus on other things to grow your

Make sure that your TP policies are in line with the business reality

Another common mistake, which a common person might find rather surprising, is that the TP policies and documentation do not reflect the reality of your business operations. When preparing TP documentation, which is often a lengthy and highly technical process, one can forget that the documentation is supposed to reflect the actual company!

How to avoid it:

Your TP policies and documentation should not be limited to what the contractual forms are. It should also reflect the economic substance of each transaction and entity involved. If, for example, an entity provides a service that adds value to your product, this should be apparent in your TP documentation and policies (and should be understandable to the tax authorities), and priced using an appropriate pricing method.

Incorrect TP method

Finally, companies often choose a transfer pricing method that is not appropriate for the specific transaction or service. This is understandable, given that there are many TP pricing methods and that some transaction can be complex, thus choosing the right method for TP pricing can be difficult. However, the wrong method of pricing can and will be challenged by tax authorities.

How to avoid it:

1. Be familiar with the OECD guidelines, which go into detail about how to apply pricing methods to different transactions.

2. Perform Functional analysis - identify the function, assets, and risks of the entities and their transactions. This will ensure that your choice of pricing method is factual and based on the reality of your business operations.

3. Consult experts - given that the choice of pricing method can be difficult, don't hesitate to ask Transfer Pricing experts to guide you in choosing an appropriate method for your transactions (such as our iVC consultants!).

Conclusion

Transfer pricing can be challenging, especially when just starting out in your international operations. If you want to ensure that TP doesn't cause you headaches, consider asking iVC! We will be happy to provide TP guidance, backed by years of experience and the highest standards of quality.

Connect with us for for tailored solutions and expert advice to keep your TP practices compliant and efficient!