Transfer Pricing Policy

Transfer pricing policy refers to the set of guidelines and principles that a company establishes to determine the pricing of goods, services, or intangible assets that are transferred between its affiliated entities or divisions located in different countries or tax jurisdictions. Transfer pricing is a critical aspect of international taxation and is subject to various laws, regulations, and guidelines in different countries.

Arm’s length principle is the concept that the transfer prices between related parties should be similar to the prices that would have been charged between unrelated parties in a similar transaction under similar circumstances.

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    Contents of a Transfer Pricing Policy

    A well-designed transfer pricing policy typically includes the following elements:


    Companies need to maintain documentation that supports the transfer pricing policies and methods used, demonstrating that they have followed arm’s length principles. This documentation may include functional analyses, economic analyses, comparable benchmarking data, and other relevant information.


    The transfer pricing policy should specify the method or methods used to determine transfer prices, such as the comparable uncontrolled price (CUP) method, resale price method, cost-plus method, or profit split method, among others. The methodology should be consistent with the applicable local regulations and guidelines.

    Compliance with local Regulations:

    The transfer pricing policy should ensure compliance with local laws and regulations related to transfer pricing in each country or tax jurisdiction where the company operates. This includes understanding and adhering to local documentation requirements, disclosure obligations, and penalties for non-compliance.

    Risk Assessment:

    The transfer pricing policy should assess and address potential risks associated with transfer pricing, such as tax audits, disputes, and penalties. It should also consider the company’s risk tolerance and the level of documentation and supporting evidence required to defend the transfer pricing arrangements in case of a challenge from tax authorities.

    Alignment with Business Strategies:

    The transfer pricing policy should be aligned with the company’s overall business strategies and objectives, taking into consideration factors such as the functions performed, risks assumed, and assets employed by each affiliated entity involved in intercompany transactions.

    Periodic Review:

    The transfer pricing policy should be reviewed periodically to ensure its continued effectiveness and compliance with changing local regulations and business circumstances. Any necessary adjustments or updates should be made accordingly.


    How to draft a Transfer Pricing Policy?

    Structuring a transfer pricing policy involves several steps to ensure that intercompany transactions are conducted at arm’s length, meaning they are priced as if they were conducted between unrelated parties. Here are some steps to help you structure a transfer pricing policy:

    1. Understand Transfer Pricing Regulations:

      Familiarize yourself with the relevant transfer pricing regulations and guidelines in your country or region. Transfer pricing rules may vary from country to country and can be complex, so it’s important to understand the specific requirements and compliance obligations in your jurisdiction.

    2. Identify Controlled Transactions:

      Identify the types of controlled transactions that occur within your organization, such as sales, purchases, services, loans, royalties, or other intangible property transactions between related parties. These transactions may be subject to transfer pricing rules and should be analyzed to determine their arm’s length pricing.

    3. Conduct a Functional and Economic Analysis:

      Perform a thorough functional and economic analysis of the controlled transactions to determine the appropriate transfer pricing method to apply. This analysis involves identifying and comparing the functions, assets, and risks of the related parties involved in the transactions, as well as benchmarking the results against comparable transactions conducted by unrelated parties.

    4. Select a Transfer Pricing Method:

      Choose the most appropriate transfer pricing method based on the results of your functional and economic analysis. Common transfer pricing methods include the Comparable Uncontrolled Price (CUP) method, the Resale Price Method (RPM), the Cost Plus Method (CPM), the Transactional Net Margin Method (TNMM), and the Profit Split Method (PSM). The selection of the method should be supported by a robust analysis and documentation.

    5. Document Transfer Pricing Policies:

      Maintain comprehensive documentation to support your transfer pricing policies. This documentation should include a description of the controlled transactions, the selection and application of the transfer pricing method, the analysis of comparable transactions, and any other relevant information. Adequate documentation is essential for demonstrating compliance with transfer pricing regulations and defending your transfer pricing policy in case of a tax audit.

    6. Update and Review Regularly:

      Transfer pricing policies should be reviewed and updated periodically to ensure continued compliance with changing regulations and business conditions. Regular reviews of your transfer pricing policy can help identify any potential risks or issues and allow for timely adjustments to mitigate those risks.

    It’s important to note that transfer pricing policies should be developed on a case-by-case basis, taking into consideration the specific circumstances of your organization, the complexities and the controlled transactions involved. Properly structuring your transfer pricing policy is essential to mitigate the risk of transfer pricing adjustments, penalties, and disputes with tax authorities.

    HLB HAMT has a team of qualified professionals and transfer pricing experts who can ensure compliance with complex and evolving transfer pricing rules and regulations.



    Frequently Asked Questions

    1. What is meant by transfer pricing?

      Transfer pricing, which can involve the transfer of tangible products, services, as well as financial transactions, is the process of determining the prices paid between related firms in cross-border transactions.

    2. What principle applies?

      The “arms-length” principle is the basis of transfer pricing regulations in the majority of nations.

    3. Who is covered by the transfer pricing regulations?

      MNEs having regulated transactions among affiliated firms in several tax countries are affected by the transfer pricing requirements.

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