Transfer pricing refers to the prices set in international transactions between related companies, such as between a development center in one country and a manufacturing center in another, both under the same corporate structure.
Transfer prices should be determined as objectively as possible since these transactions may trigger tax events. Tax authorities in different countries closely examine whether the prices reflect market value to prevent aggressive tax planning and profit shifting from high-tax jurisdictions to low-tax ones.
Startups and tech companies often need to conduct thorough transfer pricing work to comply with tax authorities and avoid legal and regulatory risks. Below, we explain how Danoy helps these companies manage transfer pricing professionally and efficiently.
How Are Transfer Prices Determined in Startups and Tech Companies?
Transfer prices must reflect the prices at which similar transactions would occur between independent parties. To establish transfer pricing between companies, a comprehensive study should be conducted to support the chosen pricing. This study may include:
- Identifying comparable transactions – Comparing prices at which unrelated companies conduct similar transactions.
- Selecting an appropriate pricing method – Using recognized methods such as direct price comparison, profit margin analysis, or profit splitting.
- Adjusting pricing based on business activity – Setting different prices for development services, intellectual property usage, management services, and product sales.
Without thorough market research, transfer prices may be deemed unreasonable by tax authorities, leading to in-depth audits and the risk of unilateral tax adjustments. Therefore, the initial research should be conducted by a financial expert with prior experience in transfer pricing and working with international companies.
Preparing for Audits: Transfer Pricing Documentation and Reporting
To minimize the risk of tax authorities rejecting your transfer pricing, it is recommended to document all supporting evidence and the logical process followed when determining transfer prices during the research phase.
When conducting a transfer pricing study, keep records of the financial analysis that reflects market conditions or competitors’ transfer prices. Maintain documentation of the calculations performed and any other financial analyses used. Additionally, store records of price updates over time and the supporting evidence for those changes.
Lack of sufficient documentation may lead tax authorities to unilaterally adjust prices and impose additional, sometimes retroactive, taxation.
Conducting Periodic Transfer Pricing Reviews
Startups and tech companies are constantly evolving, meaning that transfer prices set in one year may no longer be relevant later. To avoid penalties and tax audits, periodic transfer pricing reviews should be conducted. These may include:
- Reviewing market changes and their impact on existing pricing.
- Comparing prices with industry competitors to ensure alignment with market standards.
- External tax expert audits to identify risks and optimize pricing strategies.
Internal audits help ensure regulatory compliance and reduce the risk of intervention by tax authorities. It is recommended to conduct them regularly according to a structured internal protocol and keep detailed records in case you need to defend your transfer pricing before tax authorities.
Transfer Pricing: Entrust the Work to Experts
Transfer pricing is an integral and crucial part of the financial management of startups and tech companies operating in multiple countries. To avoid penalties or unexpected tax audits, it is advisable to entrust transfer pricing management to financial experts specializing in startups and international tech companies.
At Danoy, we assist many of our clients in managing transfer pricing across multiple countries. To minimize exposures and manage your startup’s or company’s transfer pricing correctly, contact us – we’re here to help!