Do I Need Transfer Pricing?

What transfer pricing actually is

If you've got entities in two countries and one does something for the other, whether that's building the product, selling it or transferring cash, that exchange has to be priced.

Transfer pricing is the ruleset that determines that price; it isn't really up to you to choose (sorry!). This is because the price can affect how much profit each entity keeps, and no jurisdiction wants less profit flowing into its coffers.

The basic principle is that the transfer price should be comparable to what two unrelated companies would have agreed to. This principle suffers from one of the most unfortunate names in tax: the arm's-length principle.

Is this for me?

Here’s a quick gut check for whether you need to worry about transfer pricing:

• You have entities in more than one country
• You recharge costs between your entities (services, cash, or other costs)
• Your contracting entity (where you sell from) and the entity that owns IP are not the same
• Money moves between your entities without an agreement behind it
• You're planning to expand internationally in the next 12 months.

If you’ve ticked even one, transfer pricing already applies to you.

What it looks like in practice

It starts with a transfer pricing policy.

This involves analysing your entities and their functions, and mapping what tangibles and intangibles move between them to work out what transactions exist. With only 10,000 transfer pricing experts in the world, this is a highly sought-after skill.

For each transaction, the best pricing method is determined, and benchmarking is generated to show that independent companies would have agreed to something similar.

Once that’s signed off, intercompany agreements can be drafted — the contracts that put the policy into action: "Entity A provides Entity B such and such, and this is the mark-up, interest rate, or royalty fee."

Last, but by no means least, the financial attributes of each agreement have to be coded into your accounts. Entities invoice each other according to those agreements, and every entity’s books should carry the same numbers so that, at year-end, you can submit tax returns with minimal co-ordination friction.Getting those agreements in place, and keeping the pricing behind them defensible, is what Inkle does.

What happens without a policy

Without a policy in place, nobody has decided what your entities should charge each other, so the number becomes whatever was wired that month. Profit then sits wherever the money landed, and that’s where it gets taxed. If those numbers don’t make sense, you’re either overpaying tax somewhere or building up a problem you won’t notice until someone else does. In practice, that’s usually a diligence team, an auditor, or a tax authority.

How Caribou helps

At Caribou, we do this for scaling companies: designing the policy, determining the pricing method, drafting the intercompany agreements, and giving your accountant the entries to book. Then we keep it up to date as your group evolves.

It’s a live setup, not a one-off document that goes in a (imaginary) drawer - so when someone does ask, the answer already exists.

If money's moving between your entities and nothing's written down to back it up, book a demo.

Written by Juan, Founder of Caribou.