While transfer pricing agreements can be complex documents, they are not the great mystery big name law firms would have you believe. They are based upon a simple principle.
When lawyers and attorneys talk about transfer pricing, they are referring to the price agreed upon to transfer goods or services within a group of companies. Any deal between companies with the same owner or parent company – or in any way under the same control – will be subject to Transfer Pricing. The arm’s length principle clearly states that transactions between related companies or entities must be as close as possible to the same transaction that would occur between two unrelated parties. This is to prevent related companies from unfairly avoiding tax burden by shifting revenues to lower tax countries.
Because of this, Transfer Pricing can be a complex and sensitive issue. It is important to have a lawyer or attorney who is experienced in this area to help you draft an agreement that is in compliance with the law, while minimizing your tax burden.
These agreements are critical documents for groups of companies, especially those operating in multiple countries, when the tax authorities come knocking.
More and more countries are making them mandatory, for example in Thailand if your revenues exceed THB 200 million baht you must file disclosure of the agreement with the Thai Revenue Department.
Even if your group is not over the mandatory requirement, you will want one in place if you are ever hit with an audit.