How Does Transfer Pricing Benefit Your Business?
Transfer pricing refers to the rules and methods of trade between two companies under common ownership or control. Transfer pricing documentation is a highly important procedure because it provides the company with an avenue to detail out the company’s background, functions, and related party transactions, including pricing and strategy.
When the documentation is prepared early, it saves a significant amount of time and manpower when the documentation is requested by the tax authorities for submission.
Since transfer pricing has various impacts on an organization and its Group, it is important to review the transfer pricing strategy and documentation to make sure maximum transparency is present all across the business and international trading.
Benefits of Transfer Pricing
- Transfer pricing enables multinational corporations to gain profits individually for all the divisions/entities/subsidiaries they have.
- Transfer pricing is also beneficial for large-scale organizations to determine the performance and progress of each division or subsidiary separately. As a result, they can develop suitable strategies to enhance performance in a more targeted way.
- Apart from compiling the reported profits of each division or subsidiary, transfer pricing documentation is also important for organizations to allocate resources while evaluating the overall cost of each division or subsidiary.
- A multinational organization often consists of several legal entities. In such a situation, transfer pricing plays a critical role in allocating the profits to the entire organization (including the separate entities) by considering the tax liabilities in various countries.
- Transfer pricing documentation enables organizations to set the price among different division or subsidiary.
- Transfer pricing documentation is a legal and reliable method of getting tax advantages for multinational organizations.
- Organizations can ensure profits are generated for offering goods and services in various countries that have a lower tax rate.
- A major advantage of transfer pricing documentation for organizations is that it helps in reducing duty cost. As a result, organizations are able to ship goods to high-tariff countries at minimum transfer prices and pay a lower duty base.
1. Compliance
International trading can be quite tricky, especially when a large-scale organization and its entities are operating in multiple countries at the same time. There is a wide range of rules and regulations that have to be considered during this process.
However, if an organization and its entities in different countries have a reliable strategy in place for transfer pricing documentation, they can avoid heavy fees and penalties. This process will make sure that the organization is complying with the rules and regulations. As a result, the organization will be able to run smoothly and efficiently without running into any legal hassle.
2. Performance Evaluation
Other than evaluating the performance of an organization as a whole entity, transfer pricing documentation is also helpful in evaluating the performance of each division or subsidiary of the organization. Moreover, it enables the business owners, managers, and supervisors to target the areas that are not performing up to their expectations and make suitable changes to enhance productivity and efficiency.
In short, with transfer pricing documentation, organizations are able to evaluate their performance and determine whether any changes and adjustments are necessary to enhance performance.
3. Allocation of profits
The fact that different legal entities can be owned by a single corporation makes it important to prepare a thorough transfer pricing documentation. For organizations that engage an accounting service in Malaysia, the accountants will study all of the branches of the organization and ensure that the allocation of profits across the group is done appropriately.
It essentially facilitates organizations to set a suitable price among their Group members.
In a Nutshell
The bottom line is that whether you are running a homegrown group of companies or a multinational enterprise, transfer pricing documentation must be prepared if you are involved in related party transactions.
The tax authorities have in recent years made significant changes to the penalty rates, which shows their serious attempts in ensuring that companies comply with the law, especially in regards to Transfer Pricing.
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