Think TP is just boring compliance? Think again!
Setting up a multi-national structure has so many risks and moving parts to think about, that transfer pricing (TP) documentation often gets moved to the bottom of the pile, something to be worried about when we’re bigger or when the relevant cross-border revenues become material. However, as not using a toothbrush leads to massive cavities which are very painful to fix, experience has shown that the transfer pricing documentation should actually be one of the first items on the long international expansion list.
Today we try to explain why sorting your TP position upfront can actually help you achieve your overall goals. Thinking about TP as a purely compliance obligation is so 2000, the real clever clogs use TP to plan and improve their international structures from the get-go.
For instance, did you know that preparing a proper functional and risk analysis (the detailed transactional business breakdown which forms the basis of a TP analysis), could actually assist the group in mitigating other risk areas like the dreaded place of effective management or permanent establishment risks?
In performing the functional and risk analysis of a multi-national (and by multi-national we don’t only mean a massive group with a presence all over the globe but even two connected entities in two different countries), the transfer pricing experts dig into the detail of what the business really actually does to make money, i.e. what happens where and who does it and how. This analysis interrogates every single transaction and decision that is made and risk that is borne by the business. Not only does this functional and risk analysis guide the group in choosing the correct split of profit between jurisdictions, but it illuminates where the decisions of the group are being made from.
Tax authorities, including our beloved SARS, are always very keen to pull any offshore company into the home tax net by arguing that the company is effectively managed from that country. The transfer pricing documentation could in this instance raise red flags to the company when they are in the planning stages of expansion so that the right decision makers are placed in the right jurisdictions, and to put SARS in its place before the argument is even made.
The term “permanent establishment” is also one that gets thrown around by tax authorities globally so that profits of groups get taxed in different jurisdictions than intended. Well, did you know that the transfer pricing policy could guide the group in doing business in such a way that this risk is taken out of the equation? The transfer pricing policy could guide the group in such a way as to clearly demonstrate that one entity does not do business from a fixed place of business in another jurisdiction, and that people do not have the authority to conclude contracts in other jurisdictions, and voila the permanent establishment risk is gone! So, TP documentation isn’t just a chore, it can help document and guide the behaviours we want to mitigate other tax risks.
Another major benefit of moving the transfer pricing documentation to the top of the list is that business opportunities could be identified early on. By looking at the functions of the group as a whole and then at the building blocks provided by the individual companies to achieve the overall goal, jurisdictional advantages could be identified and addressed from the start. For instance, where should goods be distributed from? Some countries have better customs regimes than others. Another example is to not set up an entity in South Africa if the group will be developing intellectual property because further down the road, e.g. SA exchange control might put a spanner in the works if the IP is intended to be sold, and by then it is too late to un-spanner the set-up.
So, what we are saying is basically: do not underestimate the power of transfer pricing planning documentation for non-transfer pricing purposes when structuring a cross-border business.
The clever tax-woman, nay the clever business-woman, considers TP as a strategic tool not a compliance burden. If you’d like to discuss TP from a non-boring, value-adding perspective, contact us today.
About the author:
Today’s newsletter was written Irma Lategan, who is not a TP specialist. Irma heads up the Private Clients Team and is based in Cape Town. Irma can be contacted at email@example.com