Companies risk millions in fines by not complying with transfer pricing rules on intercompany charges and licensing fees for intellectual property paid to local trading subsidiaries. Ken Almand, partner and UK head of transfer pricing at RSM and Paul Sutton, founder, LCN Legal, explain the essentials for TP tax compliance
The increasing vigilance of international tax authorities in relation to transfer pricing compliance should concern all multinational businesses. In essence, transfer pricing rules are designed to prevent international groups from diverting profits to avoid paying local taxes such as corporation tax.
One key focus of attention for tax authorities is the level of intercompany charges paid by one group entity to another – such as licence fees paid by a local trading subsidiary to its parent. Clearly, the higher the amount of the licence fees paid by the subsidiary, the lower its profits will be.
Transfer pricing rules allow local tax authorities to challenge the amount of such intra-group charges, and to substitute amounts which are considered to reflect an ‘arm’s length’ compensation for the value created and the risks assumed.
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