In designing, implementing, and monitoring your transfer pricing policies, pay more attention to the base. We often get hung up on whether a given margin or markup percentage falls within the arm’s-length range, but often your true risk lies in the calculation of the cost and revenue base on which that markup is applied. This is reflected in the increased focus by administrations on obtaining and analyzing underlying financial data to compare to the tax return’s assertions.
Think about it: say your captive service provider entity has a 5% markup policy, and that is applied to a $100 cost base for $5 of income. If a tax authority adjusts that markup to 7%, you now have an income deficiency of $2. If, however, that tax authority accepts the 5% markup as arm’s-length, but assesses the applicable cost base to be $200, your potential income adjustment is $5.
What’s more, the base can be highly subjective and challengeable, given that many transfer pricing methods require full loading of indirect costs and overheads, as well as appropriate allocation metrics.
It’s a good reason to take a close look at the accuracy and reproducibility of your transfer pricing adjustment calculations today.
Think about it: say your captive service provider entity has a 5% markup policy, and that is applied to a $100 cost base for $5 of income. If a tax authority adjusts that markup to 7%, you now have an income deficiency of $2. If, however, that tax authority accepts the 5% markup as arm’s-length, but assesses the applicable cost base to be $200, your potential income adjustment is $5.
What’s more, the base can be highly subjective and challengeable, given that many transfer pricing methods require full loading of indirect costs and overheads, as well as appropriate allocation metrics.
It’s a good reason to take a close look at the accuracy and reproducibility of your transfer pricing adjustment calculations today.
Chad Martin directs Eide Bailly's Transfer Pricing Services practice.
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