Transfer pricing may begin as a technical matter between related companies, but as a business grows, it becomes part of its financial story.
Consider an Israeli startup with a US entity. The product is developed in Israel and sold to American customers. Management sees one company, one team, and one vision. Tax authorities, accountants, and investors see an international structure that must be clearly explained.
Transfer pricing applies worldwide, but Israeli and US entities are a common structure among Israeli startups. The key question is not only how much money moves between them, but whether those financial flows reflect how the business actually operates.
What happens when the company tells one story, but the money tells another?
Transfer Pricing Is More Than a Calculation. It Tells a Business Story
Transfer pricing determines how related companies charge one another for development, technology, services, intellectual property, loans, and other activities.
The basic principle is that these transactions should follow terms similar to those agreed between independent businesses. The US Internal Revenue Service (IRS) may adjust income, deductions, or credits when related-party transactions do not properly reflect how income should be allocated.
Transfer pricing must answer key questions: Who develops the product? Who sells it? Who owns the intellectual property? Who bears the risk? Who receives the profits?
A company may present its main commercial activity as US-based, while most management, development, and value creation remain in Israel. This does not necessarily indicate wrongdoing, but it may show that the financial structure does not match the business activity.
Transfer Pricing with Danoy: One Clear Business Story
Inaccurate transfer pricing may lead to tax adjustments, interest, penalties, and significant exposure. In the United States, a substantial valuation misstatement involving related-party transactions may result in a penalty of 20% of the tax underpayment, rising to 40% in more serious cases.
Transfer pricing becomes especially important during fundraising, due diligence, strategic investment, or an acquisition. At these stages, agreements, invoices, financial statements, cash flows, and actual business activity must tell the same story.
At Danoy, we examine transfer pricing as part of the company’s wider financial structure. Are responsibilities clearly divided between the Israeli and US entities? Do financial flows reflect the work performed by each company? Can management explain where value is created and how it appears in the financial statements?
Clear and consistent transfer pricing supports a stable, credible international structure. Danoy helps companies ensure their numbers reflect how the business actually operates.
If your company has an international structure, especially ahead of fundraising, growth, or an exit, talk to us.