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What is transfer pricing?

Transfer pricing involves setting a structure and price for inter-company transactions between business units, divisions or entities (“related parties”) within a company. Inter-company transactions involve the license of intangibles, sale of products, provision of services, cost sharing, and financial transactions.


Why does it matter?

Profits are shifted if the price for a transaction is too high, or too low, often resulting in a material error in the financial statements for one or more related parties. This happens too often, mostly because the transfer price is based on an old policy that was not revised as the business changed, and no one saw the harm in leaving it that way.

Policies that were once “reasonable in the circumstances” do not meet the new and higher “arm’s length” standard.

Simple transactions can be easy to explain, but difficult to defend depending on the policy and its supporting details.  Complex transactions can be difficult to explain, hard to support, and even harder to defend. Most companies have both types of transactions.  It is easy to see how inaccuracies occur in the price of inter-company transactions, and how important those errors are to the profits reported by different business units within a company.


Who cares?

The tax authorities care if profits are shifted to related parties in different countries, resulting in fewer taxes paid in one or more countries.  This is why transfer pricing is the single largest issue under audit, and why there is a steady stream of tax disputes, court cases, Competent Authority requests and Advanced Pricing Agreements.

Others care too!  Errors in transfer pricing, which puts or leaves profits in the wrong places, affects just about everyone – employees, management, directors, shareholders, banks, regulators and other stakeholders.


What you can do

Taking time now to review the price of inter-company transactions will provide new insights and important opportunities.  Neglecting this issue, by continuing to use the same price for inter-company transactions year-after-year can lead to significant errors and omissions in the profits of one or more of the business units within your company.  A company will spend significantly more time later to deal with the risks posed by a dispute of the inter-company transactions. 

Often a “special project” is needed to determine a better structure and price for inter-company transactions that better reflects today’s facts and circumstances.  Ultimately, it is all about each business unit getting paid for what they do and sharing (or not) in the residual profits or losses.


We can help

This is why companies turn to MDW Consulting Inc. and transfer pricing expert, Matthew Wall, for advice and guidance.