Transfer Pricing

In today’s highly dynamic global business environment, combined with increasing pressure from tax authorities to collect revenue from every possible source, transfer pricing has risen to the forefront of tax and financial matters worldwide.

The regulatory framework for transfer pricing essentially requires that the allocation of profits between related parties reflects the actual process of value creation within the group. This means that transfer prices must align with economic reality, and that profits should be distributed according to each group member’s contribution to creating value. If this is not the case, an adjustment of the tax base is required.

WTS assists taxpayers in gaining a better understanding of transfer pricing and in preparing the full set of transfer pricing documentation in accordance with local regulations. Our specialized methodology in the field of transfer pricing is based on OECD Transfer Pricing Guidelines, the Corporate Income Tax Law, as well as the Rulebook on Transfer Pricing.

Preparation of a Transfer Pricing Report

The Rulebook on Transfer Pricing defines the form and content of the transfer pricing study, submission deadlines to tax authorities, the selection and application of transfer pricing methods, as well as the procedure for determining the basis for calculating depreciation costs when a fixed asset is acquired in a transaction with a related party. Under local regulations, the mandatory elements of the report include:

• Analysis of the group of related parties to which the taxpayer belongs

• Analysis of the taxpayer’s business activities

• Presentation and analysis of intercompany transactions

• Functional analysis – value chain analysis of the group, activities, and risks assumed in transactions

• Selection of the method for verifying compliance of transfer prices with the “arm’s length” principle (with justification for acceptance or rejection of each method)

• Comparability analysis (if comparing transactions with related and unrelated parties)

• Conclusion on the need for tax base adjustments

• Appendices (data from utilized databases, intercompany agreements, calculations, benchmarking analyses, etc.)

Once the transfer pricing report is completed, the relevant section of the tax balance sheet concerning transfer pricing is prepared.

Methods for Verifying Transfer Prices

According to the Rulebook on Transfer Pricing, the following methods are applied, including possible combinations:

1. Comparable uncontrolled price method

2. Cost-plus method

3. Resale price method

4. Transactional net margin method

5. Profit split method

6. Any other appropriate methods based on reasonable assumptions

Taxpayers and consultants often make common mistakes when analyzing transfer prices and preparing transfer pricing studies. You can read more about these in a dedicated article.

Why Transfer Pricing Is a Risk Area

Transfer pricing is a relatively new discipline in economics and stems from the conditions of modern international business. It carries significant risks, given the opposing interests of tax authorities—seeking to maximize revenue—and multinational companies—seeking to minimize tax liabilities.

Since the calculated corporate income tax amount is based on certain assumptions, such as available data, company strategy, and factors influencing price formation, it is important to emphasize that transfer pricing is not an exact science. The key objective is to reach a reasonable determination of taxable profit in accordance with the arm’s length principle.

See the most frequently asked questions from taxpayers regarding transfer pricing.