Transfer pricing is the process of setting prices for transactions between related parties, usually where goods, intangibles, services or finance are supplied from one group company to another. Many small- and medium-sized enterprises (SMEs) in Ireland may think that transfer pricing is only relevant for large multinationals, but this is not the case. Once Irish companies begin to trade in different jurisdictions, their transfer pricing policy will effectively determine the profits or losses recognised in each jurisdiction. This presents both an opportunity to optimise tax savings and a risk of incurring additional costs from a transfer pricing audit if not handled correctly.
Specific relevance for Irish SMEs
The relevance of transfer pricing to Irish firms is due to the comparatively early stage at which many SMEs must begin to explore overseas markets. Ireland is a relatively small marketplace, and growth-oriented Irish firms must begin exporting or expanding their operations overseas at a far earlier stage than many of their international counterparts.
This very quickly gives them a taxable presence in foreign jurisdictions, which typically have corporate tax rates well in excess of 12.5%. These firms must plan for how they will be taxed in those locations and how to manage their overall effective tax rate.
Having a transfer pricing model that is both supportable and scalable is a significant advantage to Irish SMEs expanding abroad, and a tool that can protect and enhance value in scaling businesses.
First steps and planning ahead
As with so much else in business, it is crucial to plan ahead — in this case, by putting a transfer pricing policy in place. The process of setting prices for related-party dealings cannot be arbitrary and must be implemented in the same way as if the parties involved were not related.
The price charged between related parties and the method of arriving at that price should be very similar to that which would apply to an unrelated party. The emphasis should be on the functions performed, assets owned, and risks borne by each affiliate in an Irish multinational business. It is important to look at the entire value chain, from research and development (R&D) through production, distribution, sales and marketing, business support functions, and to fully appreciate where executive management decisions are made.
A properly structured and fair transfer pricing policy is an investment in the longevity and success of your business. It ensures that your pricing strategies are robust and adaptable, meeting your current needs while also preparing you for future challenges and opportunities. Whether you are navigating complex deal room negotiations, undergoing a tax audit, or planning to expand your business model into new territories, a well-crafted transfer pricing policy provides the foundation you need.
As your business continues to grow
While it’s crucial to take a long-term view when setting your transfer pricing policy, it is vital get it right at the outset — notwithstanding the cost. It may also be necessary to revisit your transfer pricing policy as your business scales up, to ensure it continues to be fit for purpose. Events like acquisitions, expansion to new territories, or appointing/relocating key senior leadership roles need to be considered. Remember, formal Irish transfer pricing compliance rules will begin to apply once consolidated group turnover exceeds €50 million.
Risk of getting it wrong, and opportunities when it is right
Tax authorities at home and abroad have increased their efforts in ensuring that companies comply with transfer pricing rules. An incorrect or poorly designed transfer pricing policy may give rise to lengthy and costly tax audits with potential penalties depending on the facts and circumstances.
More and more SMEs are looking for external funding and investment to pursue their business strategy. Having a robust and effective transfer pricing model in place as you go through various due diligence or funding rounds can be very advantageous in conveying the value of the enterprise, and helps ensure that you are set up for continued success.
Key actions businesses can take today
- Start early: develop a transfer pricing strategy from the outset of international expansion plans that reflects the economic substance and value creation of your business. This can help avoid costly adjustments down the line.
Documentation: prepare and maintain comprehensive and coherent transfer pricing documentation that supports your transfer pricing outcomes and is appropriate to your size. This is important — even for SMEs — and will be valuable in a dealroom or once you are subject to formal compliance requirements. Remember, formal transfer pricing documentation is the first line of defense in any tax audit query or due diligence process.
Monitor and update regularly: monitor and update your transfer pricing policy and documentation regularly, and be prepared to respond to any inquiries or audits by tax authorities.
Engage with transfer pricing specialists: engage with transfer pricing specialists who can help you navigate the complex and evolving transfer pricing landscape and optimise your tax position.
We’re here to help you
At PwC, our dedicated team of transfer pricing experts can assist with all aspects of your transfer pricing needs, from planning and compliance to dispute resolution. We help design and implement transfer pricing policies that are tailored to your business objectives and compliant with tax laws. We also prepare and maintain robust documentation to support your transfer pricing outcomes and minimise tax risk. Additionally, we can help you defend your policy and documentation in audits or diligence enquiries and advise on resolution strategies.
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