The fast growth boost of startups, particularly due to increased investment, generates a need for startups to consult on tax and financial matters. Therefore, we will examine the basic Transfer Pricing issues relevant to startups, from the establishment and investment phases through to the later phases of the company.
Startups and entrepreneurship are concepts that have become more important worldwide recently, given that these are entrepreneurial companies generally established to offer solutions to any problem and show a fast and strong increase. Companies such as Facebook or Twitter, multinational companies nowadays, were initially startups.
In this phase, startups are introduced to corporate investors. An essential rule requires that such companies successfully complete a special analysis called “due diligence.” In order to successfully complete the financial and tax due diligence processes, startups are expected to minimize their tax risks before and during the initial phase.
Startups should consider the factors outlined below when developing Transfer Pricing policies to be tailored to the company’s current and potential growth, thus helping to manage and minimize tax risks.
Value Chain Analysis and Value Creation Concept
Nowadays, companies operating in several countries take high risks, set and implement strategic objectives, build highly specialized teams around the world, and develop market and negotiation power.
It is important to precisely determine which activity contributes most to value-added functions to correctly apply the Transfer Pricing principles to intercompany transactions of the group. Group companies that take significant business risks and own significant tangible and intangible assets can be expected to earn higher outputs than other companies.
Creation and Ownership of Intangible Rights
A common characteristic of startups is that they attempt to establish their brand for rapid growth, particularly by utilizing technological infrastructure. Due to the essential importance of the country in which intangible rights, such as a brand, patent, or know-how, and their ownership are developed, both the location where the DEMPE3 functions are performed, and the country that owns the intangible rights should be analyzed.
Although startups are common nowadays, they face many challenges, including pressure from capital, investors, and costs. On the other hand, these can rapidly grow through inbound investments and the fast launch of transactions in several countries. These companies need to create solid Transfer Pricing models supported by experienced consultants to minimize tax risks.