In a globalized world, more and more economic groups operate in multiple jurisdictions, thus making Transfer Pricing more relevant. Thus, the transactions carried out between the different companies operating within the same Group or operating with countries or low or no taxation territories must reflect their performance under market conditions, distributing the profits and tax burdens equitably.
This article aims to provide an overview of the Transfer Pricing role in tax planning within companies, as well as at the corporate level.
Conversely, before addressing this objective, there are two key concepts to be established for the analysis:
What is Tax Planning?
Generally, tax planning can be defined as the strategic process that optimizes the tax burden of a person or entity, ensuring that tax obligations are complied with legally and efficiently.
What is Transfer Pricing?
On the other hand, Transfer Pricing consists of the prices established for internal transactions between related entities within a national or multinational business group. These transactions may include the sale of goods, the rendering of services, or the transfer of intangible assets, such as patents or copyrights, among others.
Once tax planning and Transfer Pricing are defined, we will proceed to learn about the Transfer Pricing role in tax planning.
The Transfer Pricing role in tax planning implies a careful assessment of the risks associated with the tax burden resulting from the evaluation at the Group level, i.e., it implies an overview considering the functions played by each involved party, as well as the assumption of risks and contributions of assets in the creation of value of each transaction within the Group’s supply chain. This know-how of the Group must be along with the knowledge of tax regulations and international auditing.
Nowadays, with the adoption of information exchange by tax administrations in their fight against tax evasion and avoidance, they can review related-party transactions and adjust prices if they consider that they do not reflect market conditions. Efficient planning involves anticipating these risks and taking measures to minimize them.
Advantages of Transfer Pricing within the tax planning framework
- Reduction of the level of uncertainty regarding possible contingencies for material transactions that may eventually arise through the preparation of a risk matrix for material intercompany transactions.
- Tax savings due to the optimization of costs derived from the timely compliance of tax obligations, as well as the efficient use of profits, discounts, and deductions within the inter-jurisdictional legal framework, considering the prevalence of substance over form.
- Economies of option.
- Promotion of tax competition by the States.
- Provision of the opportunity to defer payment of taxes eventually, currently allowing greater liquidity.
In conclusion, tax planning should not be understood as a synonym for tax evasion or avoidance but rather as a key support tool to plan the tax burden orderly. This implies taking advantage of incentives and exemptions to achieve tax protection rather than resorting to deceptive strategies to avoid taxes.
Effective Transfer Pricing management entails not only regulatory compliance but also the optimization of the pricing structure to ensure a fair distribution of revenues and reduce tax risks. As the complexity of international transactions continues to increase, strategic attention to Transfer Pricing is increasingly becoming vital in corporate tax planning.