As presented in one of our recent newsletters, corporate income tax returns for 2014 should include a new enclosure identifying related-party transactions. The enclosure is expected to be a new source of information for tax administration. Therefore, it can be expected that intra-group relations will move up the scale of the tax authorities’ priorities after the end of this year.
Companies that are parties to various relationships within one group can prepare for such attention in advance with transfer pricing documentation. The documentation should substantiate that all transactions between related parties are conducted on the arm’s length principle.
Individual relationships can be analysed by companies themselves, with better or worse results. However, firms do not always have sufficient knowledge and expertise to assess all transactions or a sufficient comparison base. Undoubtedly, management services pose the biggest problem. Our clients’ representatives often mention difficulties such as proving that the services have been provided or that the services have been provided to an extent corresponding to the determined fee. Price mechanisms established before or during the global crisis may not be adequate now when the profitability of corporate groups is changing. Nevertheless, changing prices fixed for such transactions can be difficult and risky as the tax authorities may argue that, if a company carries out the same business and changes its pricing methods, then either the previous or the current method is incorrect. A detailed analysis of the situation and justification of the changes is therefore required to minimise the risk of the transfer prices being challenged by the tax authorities.
One of the methods for supporting compliance with the arm’s length principle in the comprehensive transfer pricing documentation is an expert opinion. Conclusions drawn in such expert opinions should probably be contested by the tax authority by similar means. However, this would result in additional costs with an uncertain outcome, and experience shows that this is not how the tax administrator would usually react.
It is therefore advisable to consider what supporting means the company can select to substantiate compliance with the arm’s length principle for intra-group transactions in the transfer pricing documents and what risks it will face. RSM TACOMA Valuation is experienced in preparing expert opinions on transfer prices and is prepared to assist you in this matter.