It pays to pay attention to transfer pricing
Gavan Ryle: "There is much greater awareness now but there is still less know-how here in the business community in Ireland than in other EU member states or our tax treaty partners"
Innovation Profile PwC:With recent announcements regarding international co-ordination in relation to corporation tax issues there has been increased focus on the taxation arrangements of multinational firms as well as on their “transfer pricing” policies.
Transfer pricing is sometimes used by people as shorthand for moving profits from one location to another.
The reality is that transfer pricing is simply a description of the process to set prices between related parties where there are goods, intangibles, services or finance being supplied from one to another to ensure that the appropriate quantum of profits are attributed to each party given the activities and functions they carry out, the risks they bear and the assets they own. Once Irish growth stage companies begin to trade in a number of jurisdictions, it is something that they need to pay particular attention to.
Relevant to Irish firms
Its relevance to Irish firms is due to the comparatively early stage at which many of them must begin to export.
“Ireland is a very small marketplace and growth oriented firms have to begin exporting at a far earlier stage in their lifecycle than many of their international counterparts,” says Gavan Ryle, transfer pricing partner with PwC.
“This very quickly gives them a tax presence in different jurisdictions and they then have to plan for how they will be taxed in those locations. Very often what seems like the sensible cost-effective decision early on can turn out to be the most costly in the long run.”
The example he gives is of a firm which is selling products in a number of European markets and has to decide how to apportion the costs of the Irish RD team working on a new product. One way would be to divide the costs equally among the different markets.
This would have the apparent virtue of reducing the tax bills in those countries at a time when sales are relatively low.
However, the corollary of this is that when that product starts to generate profits for the firm the operating entities in the different jurisdictions would be due to pay tax in those countries on their share of those profits even though the most significant contributor to those incremental profits was likely to have been the successful development of the new product by the Irish RD team.
As with so much else in business the solution to this problem lies in planning ahead and in this case putting a transfer pricing policy in place.
Ryle explains that the process in setting prices for related party dealings cannot be arbitrary and must be implemented in the same way as if the parties involved were not related.
So, the price charged between related parties and the method of arriving at it should be very similar to that which would apply to an unrelated party such as an authorised distributor in a country where the company doesn’t have a direct presence.