Manufacturers are increasingly expanding their manufacturing facilities or distribution operations into other countries. When expansion into another country involves a related company, the company will need to consider how to price intercompany transactions, i.e. transfer pricing. Governments around the world are extremely concerned about the erosion of their tax base and have become vigilant in their examination of cross-border transactions.
Many manufacturers will supply related entities with technical expertise such as patents, secret formulas or know-how. The transfer pricing rules relied upon by most countries are founded on the arms length principle and the guidelines established by the OECD. Other transactions which can result in transfer pricing issues include the provision of services between companies and the exchange of tangible goods. While certain services may be easy to price, in many cases the price of goods and intangibles are difficult to determine and require complex economic considerations.
Manufacturers would be wise to consider transfer pricing issues before facing a government audit to ensure that both profits and costs have been properly allocated between the companies (and countries) involved.