Plan transactions with related entities smart and consider the transfer pricing perspective

Individuals responsible in a company for financial matters should not associate transfer pricing only with compliance obligations.

Already at the stage of planning transactions with related entities, it is worth remembering about TP regulations. This will ensure the transaction is arm’s length from the very implementation.

Points to remember

When it comes to tax regulations on transfer pricing, the key matter is to properly establish and maintain the terms of transactions made between related entities – in accordance with the arm’s length principle. These regulations should be taken into account at every stage of settlements with related entities. They are of particular importance when making contracts or arrangements between related entities.

When planning a transaction, you should always consider the effects it will have in terms of transfer pricing. At the very beginning, an analysis of the business substance of the transaction is important as it will support gathering arguments for justifying its implementation.

The next stage should be a comprehensive and detailed functional analysis. It seeks to determine the importance of functions, assets and risks as well as their allocation between entities.  

Why do you need this?

The allocation of functions, assets and risks is followed by the selection of an appropriate form of remuneration. The adopted method of settlements in the transaction should be well conceived and correspond to the functional profile of the parties involved.

The next step involves preparing a benchmarking analysis. It will determine the arm’s length level of the applied remuneration in the form of a financial ratio, e.g. a share (%) or price level, etc.

Once completed, the steps outlined above will bring benefits, including:

• ensuring that the arm’s length price is applied from the start of the transaction, and
• securing settlements against potential upward adjustment and the charge of having applied non-arm’s length prices.

When arranging new settlements, you should also make sure to:

1) appropriately document the settlements in the form of a contract,

2) prepare a transfer pricing policy, i.e. a description of the principles for making the transactions and the adopted settlement methods, or

3) collect source documents to confirm that the transactions with related entities have been made and are justified from a business perspective.

Planning transactions from the transfer pricing perspective will significantly reduce the risk associated with the need to defend the arm’s length nature of the settlements made. Also, it will streamline and accelerate the process of meeting reporting obligations in the scope of preparing transfer pricing documentation or filing the TP-R form. Once established, the settlement model – that takes into account the transfer pricing regulations – may constitute a solid security for transfer pricing applied over several years.