Transfer prices

We can’t talk about calculating transfer prices if we don’t know what they are. So, let’s define this term right away.

Transfer prices are the prices at which products and services are sold between related parties, as well as for the granting of mutual loans and credit.

Since this involves transactions between related parties, there is a possibility of manipulation to avoid paying taxes.

Transfer prices are also often called controlled transactions, due to the possibility of related parties agreeing on adjustments and the aforementioned manipulations.

By law, affiliated legal entities are defined as entities connected on the basis of:

• Capital – ownership with the possession of over 25% of the ownership;
• Management function – Legal entities in which the same natural or legal persons participate in management and control or in the capital – management functions (director, chairman of the board)
• Family relationships – when a natural or legal person is the founder or co-founder of multiple companies that work together. This means when the owners or managers of the companies do business with family.

All countries in the world, including our own, protect their budgets and make sure there is no uncontrolled capital outflow. It is not uncommon for multinational companies to establish subsidiaries or branches in countries where the tax rate is lower than in their home country, and in this way transfer profits from one country to another in order to pay less tax.

Verifying whether transactions between related parties were conducted at “controlled—transfer prices” or at “arm’s length” prices aims to check the correctness of the tax calculated and paid.

Additionally, companies are increasingly taking on the role of banks, lending money to one another. The person conducting a transfer pricing study is tasked with verifying whether the borrowing company is being drained through high interest rates or if the rates are market-based.

Companies that provide interest-free loans to their related parties are also under scrutiny, as the government does not want to forgo revenue (taxes) on the uncollected interest. For this reason, the lender of an interest-free loan is obligated to declare what the interest would have been if it were charged and ultimately pay tax on that amount.

Turnover of goods and services;

• Turnover of fixed assets (equipment, business premises, land), and intangible assets (trademarks, intellectual property, licenses, trade marks…)
• Financing – intercompany loans, regardless of whether they are granted with or without interest;
• Joint participation in research and development

Who is obligated to prepare transfer pricing reports?

Any company that does business with related legal entities is obligated to calculate transfer prices.

One of the significant characteristics of transfer prices is that they are generally independent of the influence of market factors. When related parties enter into transactions with each other, all rules regarding the transactions and final prices are defined within the affiliated legal entities. As a result, it directly affects the seller’s revenue and the buyer’s expenses, ultimately leading to the control of the tax bases of both entities.

A taxpayer who has transactions with related parties is required to have transfer pricing documentation at the time of filing the corporate income tax return, containing sufficient data and analysis to confirm that the terms of the transactions with related parties comply with the arm’s length principle.

The taxpayer is required to submit the transfer pricing documentation to the Tax Administration within 30 days of receiving a request from the Tax Administration for its submission.

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