TP not a compliance – reviewed

Transfer Pricing (TP): Beyond being another Tax Compliance

TP rules are part of the tax laws of any country but is more deeply connected with business interests having roots deeper into economic reality. It is often that TP is given importance during mandatory tax filings and maintaining documentation, whereas establishment of appropriate TP policy improves overall business outcomes and maintains tax-efficiency organically.

Impact of TP on businesses is captured below:

• During Startup phase of the entity, the structuring and pricing of cross border transactions are decided based on immediate business needs, and are left for course correction at a later stage. Setting-up of TP policy ensures reaping of working capital efficiencies from the beginning, besides having robust documentation during tax scrutiny. TP requires to be aligned with indirect tax aspects such as Customs and FTA to ensure tax efficiencies and create value for the Group.
• Treating TP as a post-mortem exercise creates pressure on business resources during tax year end. With technology, Group’s operations and TP outcomes can be monitored on a concurrent basis and systems can be automated to raise flags to take corrective actions during the year itself. Through this working capital can be streamlined for the financial &tax years, taxes can be paid efficiently, and interest/penalties can be minimised. Where Group’s TP policy is aligned with Group’s risk management, TP outcomes would factor business realities and would be resilient to global economic / political/ financial crisis such as COVID, wars, and industry shocks such as supply chain disruption.
• Involvement of TP personnel during Statutory audit can help to streamline audit entries on TP and ensure more accurate disclosure of related party transactions. Making suo motto TP adjustments after closure of books would result in additional taxes (secondary adjustment) and create complications during TP audit scrutiny.
• Where selected for tax scrutiny, understanding the requirements of tax authority and filing submissions to address their requirements is key to avoid any TP adjustment. Businesses collating and maintaining contemporaneous documentation (intra group charges) would reduce hardship during course of tax scrutiny and ease Group’s resources. Filing of appropriate and complete information before lower tax authorities will reduce risk of higher appellate authorities remanding back to lower tax authorities and can reduce litigation costs.

Accordingly, there is a need to change the mindset how TP is approached: from a compliance tool to being a Business tool generating value.

VSTN can support in streamlining TP policy, thereby easing resources for core competence of business, increasing working capital efficiencies, tax optimization and increasing shareholder value.