Transfer pricing – all you need to know about your TP policy

Discover how to create a step-by-step transfer pricing policy designed to minimize and compliance and tax risks for your business.

What is a transfer pricing policy?

A transfer pricing policy outlines the rules for determining prices in transactions between related parties, ensuring they meet the arm’s length standard.

This policy is essential for companies operating within corporate groups. It helps taxpayers comply with legal obligations, such as preparing transfer pricing documentation and submitting TPR forms, while also minimizing the risk of disputes with tax authorities over related party transactions.

Is there an obligation to prepare a transfer pricing policy?

Preparing a transfer pricing policy is not mandatory. However, many jurisdictions require companies to prepare transfer pricing documentation and to file transfer pricing reporting.

To meet these obligations consistently across a group of related parties, developing a transfer pricing policy is highly recommended. It serves as invaluable support for taxpayers, ensuring clarity and alignment in compliance efforts.

Benefits of having a transfer pricing policy

Transfer pricing policies offer numerous benefits to companies:

1. Transparency and consistency – establishes clear rules for intra-group transactions, ensuring alignment and clarity.
2. Reduced risk of transfer pricing audits – supports compliance with transparent transfer pricing documentation, minimizing audit risks.
3. Operational efficiency – enhances financial management within a group and simplifies intra-group accounting processes.

What should a transfer pricing policy contain?

The transfer pricing policy should include, among other things:

1. Description of the capital group – Details the organizational structure and relationships between entities within the group.
2. Functional analysis – identifies the functional profiles, roles, assets, and risks associated with each entity.
3. Pricing methods – explains the methods used to determine prices for intra-group transactions.
4. Description of transactions – provides comprehensive details about the transactions covered by the policy.
5. Benchmarking analysis – compares transfer prices in intra-group transactions to market prices to make sure arm’s length principle is met.
6. Supporting documentation – includes evidence such as contracts and invoices to demonstrate compliance with arm’s length conditions.

How to prepare a transfer pricing policy?

A transfer pricing policy is best prepared in several steps:

1. Identify related parties – determine which entities in the group should be covered by transfer pricing policies and transaction descriptions.
2. Identify transactions covered by the policy – identify transactions that need to be described in the transfer pricing policy.
3. Choose a transfer pricing calculation method – select the appropriate methods of transfer pricing calculation for each transaction covered by the policy.
4. Verify the arm’s length prices in transactions – examine the prices that are charged in the market by independent parties.
5. Prepare documentation – record all findings, analysis and documents in an appropriate form.
6. Monitor and update – regularly review and update the policy so that it remains consistent with the real state of affairs in the transactions covered by the policy.

A transfer pricing policy is a valuable tool for managing tax risks and optimizing operational efficiency within a group. When properly designed and implemented, a transfer policy will:

1. simplify the rules for intra-group settlements,
2. improve and streamline the preparation of transfer pricing documentation and reporting of TPR forms for transactions subject to such obligations,
3. ensure intercompany transaction transparency and operational efficiency.

Maintain a detailed and regularly updated transfer pricing policy to minimize the risk of disputes with tax authorities. Drive your business forward with MDDP’s expert insights and dedicated support.