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Transfer pricing and tax planning have been in the media a lot lately as details emerge of how companies like Amazon, Google, Vodaphone and GlaxoSmithKline proactively limit their tax liabilities by shifting revenue and expenditures across international boundaries. We are told that every organization that can, is managing where their profits are deemed taxable.transfer pricing has implications beyond tax planning.

Repeatedly, we are told that the only thing to consider with transfer pricing is where tax will be levied and how much it will be.

However there are a couple of other points that are often overlooked:

  • Team Motivation
  • Business Valuation

It sounds like an unrelated point, but it is much easier to motivate a team when they profitable. If you are part of a team that is making very small margins per transaction when those transactions are within the wider corporate group, would you focus on the low margin transactions or the high margin ones? Similarly, if the margin per transaction is low, there is often a perception that pay raises will not happen, and that investment into the business cannot be justified, hardly motivating for a team.

Business change is an almost constant point in all marketplaces these days. There are huge numbers of both acquisitions and divestments going on every day. As a result, even if you have no plan to sell a part of your business today, market changes may lead you to this in the future. So the question becomes what is the balancing point between higher taxes now and higher market valuation later? Even if you decide to stay with minimizing taxes, it is important to have thought about the business valuation point as it might impact your approach and expectations when you move down that path in the future. This is especially important if your industry or organization enjoys a high earnings to value multiplier.

If we cut away all of the arguments about how transfer prices should be set, the whole concept is just to allocate the revenue for a piece of work to the people or organization who did the work or took the risk. It is just an economic model for giving a return on effort and investment.

So transfer pricing is likely here to stay (the other economic revenue allocation models are even more challenging). We are seeing the impacts of this more and more often as organizations consolidate and move production to different locations. We give you the tools needed to maintain visibility and justification of your transfer prices (have a look at customer specific pricing models and IFS Business Analytics as a starting point), however, the human factor is something every bit as important to handle. Without your people working with you, transfer pricing is nothing more than academic – for tax to be payable you need to earn a profit.

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