Advice on transfer pricing models

Transfer pricing continues to remain on the agenda – including in Germany, where the tax authorities continue to look thoroughly at all aspects of transfer pricing. This applies to many foreign countries as well. The goal for taxpayers is not only to avoid adjustments to transfer prices that affect income and thus the tax burden, but to take full advantage of the opportunities arising from structuring TP arrangements appropriately. PwC supports companies in all phases of transfer pricing structuring: from strategy development and design through to implementation and ongoing monitoring.

Transfer pricing strategy

Transfer pricing not only affects the tax rate of a group, but also the allocation of resources across the value chain. It should therefore be aligned with a group’s system of KPIs (key performance indicators, i.e. internal incentives) and business strategy. PwC helps companies develop their tax related transfer pricing strategy – taking into account the issues of business strategy, planning, value creation and implementation.

All corporate and operational functions – including supply chain management, the tax department, controlling and IT – need to be committed to working according to whatever transfer pricing strategy is developed. This requires that the processes and responsibilities are clearly defined and agreed upon with the relevant corporate functions. To ensure compliance with the strategy over time, companies need to monitor the day to day business operations continuously.

Implementation and value chain transformation (VCT)

Determining the transfer prices themselves is not enough to put the agreed transfer pricing strategy into practice. In addition, the necessary IT and organisational structures have to be developed and staff have to be trained.

A cross-border restructuring of the value chain (value chain transformation, VCT) can help achieve operational objectives. This may include, for example, the segregation or integration of business units or the creation of hub structures or shared service centres. Transfer pricing issues are an important consideration here. That is because all changes to the business model must be made in accordance with the arm’s length principle.

PwC’s services regarding the design of transfer pricing models also consider the following issues:

• Permanent establishments: In certain industries, such as the financial services, construction and service industries, permanent establishments and branches are often founded. The groups are faced with the challenge of allocating corporate profits between the parent company and permanent establishments. They need to consider current developments in Germany and internationally at the level of the OECD.
• Industries: A good understanding of an industry is needed in order to be able to develop an appropriate transfer pricing strategy. Industry experts from PwC know the critical industry factors to achieve this. They have knowledge about the regulatory framework and the research and development activities in their respective industries, and are familiar with the industry-specific market, customer and supplier structures.
• Group financing: The tax authorities are increasingly looking at intra-group and cross-border financing structures such as loans, cash pooling or the granting of credit guarantees. This involves, for example, supporting that the capital structure or the interest rate are appropriate. PwC’s specialists help optimise internal financing structures and assist in avoiding profit adjustments and penalties.