Do you run a large corporation with many subsidiaries and affiliates?
You’ll soon find out that a simple financial transaction from one division of the business to another can come with a huge tax. This is as a transfer pricing tax and it can be a huge burden on your company.
So what do you do? Can you avoid or reduce the tax?
Here’s what you need to know about the transfer pricing tax:
How Transfer Pricing Works
What happens when one department of your company buys goods and services from another department of your company?
This gets treated as a regular financial transaction as if you were dealing with third-party services. The price charged for these goods and services is considered a source of income for your company.
As a result, since you’ve received income, you can expect it to get taxed. Many corporations might prefer transfer pricing as it can save their company money. However, the tax authorities might see otherwise and demand that a tax gets paid.
You can read about transfer pricing to learn how you can use it for your company.
How Transfer Pricing Tax Works
Now let’s look at how transfer pricing tax might be applied to your internal financial transactions.
Let’s suppose you run a publishing company that has two departments. Department A sells e-books. Department B sells e-book reading devices.
Department B decides to spend $1,000 to buy e-books from Department A to load onto their devices. Let’s assume that this $1,000 is lower than the price that the average consumer would pay.
Now, to further complicate matters, let’s say that Department A is based in a high-tax country like the United States. Let’s suppose that Department B is based in low-tax jurisdictions, such as Hong Kong.
Department A might charge less to Department B in order to avoid or reduce a potential tax burden. However, tax authorities know this and might still want to charge a high tax to Department A.
So what’s the solution? You want to ensure that you keep accurate records of all internal transactions in your company. Make sure you provide the tax authorities with these details so they can tax you accordingly.
It’s not always easy to avoid or reduce a transfer pricing tax cost, but you mustn’t evade taxes as you’ll get slapped with an even harder fine!
Many large corporations are currently in disputes with their tax authorities due to this type of tax. Work with your accountant to find out how to stay compliant.
Look at Your Tax Options
Now that you know how transfer pricing tax options work, you can be better prepared for your business.
Transfer pricing occurs when one department of your company buys goods or services from another department of your company. You’ll charge your company lower prices to avoid tax obligations.
However, you might still have to pay taxes, especially if the authorities believe you’re trying to evade taxes. Make sure you have an accountant by your side to remain compliant.
You can read more articles on tax planning on our blog.
