TRANSFER PRICING

CHEAT SHEET BY BOJAN RADOJICIC

RELATED PARTIES LOCAL TP FILE ARM’S LENGTH PRINCIPLE EXAMPLE OF TRANSACTION LIST
DETERMINATION PURPOSE OF THE REPORT AND SCOPE OF Related Party
Sales (S) /
ENGAGEMENT A fundamental concept in transfer pricing, which is the practice of determining the Procurement Type of transaction Transaction amount
Introduction price at which transactions occur between related entities within a multinational Name Country
(P))
Scope and activities of engagement enterprise (MNE). It refers to the principle that the pricing of goods, services, or
Procurement of
Compliance with the Instruction/Law intangible assets in these transactions should be consistent with the pricing that Rp 1 Island P 3,477,767
network equipment
GROUP ANALYSIS
would have been agreed upon by unrelated parties under similar circumstances.
Total purchase 3,477,767

Description of the economic activity (economic Data processing

50% 75% Rp 2 Slovakia S 156,835,522
activities) of the Group services
Rp 4 Slovakia S Advisory services 37,011,993
Organizational and legal structure of the Group,
including shareholders and brief history Rp 5 Slovakia S Marketing services 15,862,281
Call center services -
General description of the business and business policy Rp 6 Slovakia S 52,874,273
20% 50% support services
of the Group
Rp 7 Italy S Call center services 957,938
General information about the Company: history, Total sales 263,542,006
ownership and organizational structure

Basic data on related parties - members of the group,

with which the Company has transactions that are
Check the rules in your covered by the obligation to disclose transfer prices

country BUSINESS ANALYSIS

Definition and classification of activities TRANSFER PRICING VALUE CHAIN
Information on market conditions: general overview of
MASTER FILE market conditions, overview of market share

Description of factors that have an impact on RISKS COMPLEXITY LOCAL MARKET ASSETS GROUP SYNERGIES
determining prices within a particular activity
A description of the company’s activities
Defining the risks that arise in connection with doing
Organizational structure business in a specific activity VALUE CHAIN IN IC TRANSACTIONS

FUNCTIONAL ANALYSIS
Geographic locations of operations
Negotiation
Main value/profit drivers Data on types of transactions with individual related Product Engagement Product Aftersale
with Programming
parties concept of resources delivery services
customers
Descriptions of business activities of business units Ability to view each transaction individually
SUPPORT AND GROUP EFFECTS

(products and services)

A description of the activities undertaken and the risks, KNOW HOW BRAND TECHNOLOGY
Intangible assets as well as the funds engaged in the transactions
Intercompany financing GENERAL MANAGEMENT
Description of the decisive factors that influenced the
Enterprise financials and tax positions determination of prices in transactions with related RESEARCH AND DEVELOPMENT
parties
Functional analysis PROJECT MANAGEMENT
Determining the essential economic position of the
TP RISK INDICATORS
FUNCTIONAL ANALYSIS CHECK LIST
taxpayer in transactions

SELECTION OF MOST APPROPRIATE TRANSFER PRICING

Significant transactions with low tax jurisdictions METHOD

Specific types of payments Methods for the verification of transfer pricing

Loss making and poor results Factors that influence the choice of the methods
High debts
Intangible transfers
The selection of methods per transaction (transaction
type)
TP METHODS
Poor documentation COMPARABILITY ANALYSIS
Restructurings CONCLUSION

COMPARABILITY ANALYSIS EXAMPLE Functions Activity Risks Assets

FOR OFFICE SPACE RENT Supplier negotiation Operational risk Warehouse

Pricing negotiation FX risk Working capital

Comparability factor Conclusion Purchase
The office space leased by the Company from a related party and the office
Quality checks tatMarket risk Employees
space leased from unrelated parties are located in comparable locations.
Similarity, i.e. characteristics of the subject of the transaction
From the point of view of location, the premises have similar conditions and Transport organization Goods damage risk Vehicles
are in similar conditions.
Market research Sales people risk Brand
The office space leased by the Company from a related party (516m2) is
Similarity in quantity smaller than the space leased by the Company from unrelated persons
NNand MM. The transactions can be considered comparable, regardless of Sales Brand awereness Competition risk Vehicles
differences in area, because they have a similar purpose.
Sales Market risk R&D
We can conclude that the performance of the Company's activities in these
Activities performed by parties and assumed risks arising
transactions according to the related party XXX LTD, similar to the Visiting customers Credit risk Working capital
(functional analysis)
transaction with an unrelated party. The same conclusion applies to the risks
assumed and the funds engaged.
Contract conditions are similar, individual differences do not affect largely to Warehousing Inventoriy risk Warehouse
Contract terms
the price

Economic ie. market circumstances We can also say that the market conditions are similar, since the purpose and Distribution Quality and other control Transport risk Vehicles
purpose of the space is similar.

Based on above, We believe that the transaction with unrelated persons MM

Transportation Goods damage risk Employees
Conclusion
and NN is comparable to a controlled transaction

METHODS APPLICATION CRITERION

Compliance with Compliance with Compliance Compliance with Compliance with
CUP RM CPM TNMM PS
criterion criterion with criterion criterion criterion

Identification of costs related to the sale of products / Availability of information on the amount of profit earned in the
Existence of internal potentially comparable transactions Yes / No Procurement of goods from related parties Yes / No Yes / No
services to a related party and comparability of the cost Yes / No Reliable identification and allocation of operating income and relevant transaction
Existence of external potentially comparable transactions Yes / No base expenses related to the controlled transaction to calculate the Yes / No
Resale of goods procured from related parties to unrelated parties Yes / No Availability of information on internal comparable gross net margin in controlled transaction Availability of information on factors of division of profit and
The possibility to determine price in a comparable transaction Yes / No Yes / No Yes / No
margin access to distribution of profit in a controlled transaction
Availability of information on comparable gross margin Yes / No
Similar subject of transaction (nature, quantity etc.) Yes / No Similarity of the subject of the transaction (nautre, quantity
Yes / No Availability of comparable transactions and data by independent
etc) Availability of information on internally comparable net margin Yes / No Yes / No
Similar contract terms Yes / No Availability of comparable information from unrelated parties in a parties
Yes / No Similar contract terms Yes / No
comparable transaction
Similar economic/market conditions Yes / No
Similarity of economic / market conditions Yes / No Availability of data from external sources – (databases) Yes / No
Availability of information and quantifications of factors that Yes / No Similarity of the subject of the transaction, quantities, contractual Identification of costs related to the sale of products /
Yes / No services to a related party and comparability of the cost Comparability of the subject of the transaction Yes / No
affect the comparability of transactions terms and economic / market conditions Yes / No
base Functional comparability Yes / No TP DATABASES
Similar contract terms Yes / No
Similarity of economic / market conditions
TP PROFIT LEVEL INDICATORS
Yes / No
14 STEPS TO PREPARE TP BENCHMARKING HOW TO APPLY DATABASE FILTER
Reliability and availability of accounting records Yes / No

Providing an independent denominator in relation to a

Yes / No

TNMM 1. Apply indepenence indicator controlled transaction when calculating margins

Transactional net Net profit X

2. Exclude early stage or startup effects Consistency in measuring net profit in controlled and
=
in comparable profitability
Yes / No
uncontrolled transactions
margin Revenues from sales 100
3. Select a companies with standalone
Transactional net Net profit X financial statements
=
margin Operating expenses 100 4. Select comparable location TP & STATISTICS
5. Select appropriate business
Transactional net Net profit X activity/code
= INTERQUARTILE RANGE
margin Assets 100 6. Eliminate a loss generating
companies IQ & MEDIAN CALCULATION Used if uncontrolled comparable price or margin is approached
Transactional net
=
Total profit X 7. Check publically available data on high number of data. Then, transfer price of transaction does
not differ from its price according to the " arm's length " principle
Interquartile range calculation
margin Operating expenses 100
8. Find relevant info to confirm Minimum -3.00% if the value of the transfer price is within that range.
production and functional I quartile 2.25%
Median 4.73% MEDIAN
CPM comparability III quartile 17.20%
Sales revenue – Cost of
products and services X
9. Check economic circumstances Maximum 36.01% If transfer price is out of the range, then tax base adjustment
Transactional net margin = Operating profit/Operating expense could be required. Median is usually used as point in the range
Cost plus margin =
Cost of products and 100 10. Check ratio numbers and FS Company Country Weighted average when calculating the adjustment.
services 11. Make and adjustments if possible C1 GB -3.00%
C2 IT 1.45%
RM 12. List a final set of comparable C3 RS 3.04%
AVERAGE

Sales revenue – Cost of 13. Final calculations C4 GR 4.73%

Weighted average is used when multi year data is applied. Also,
C5 IS 6.64%
Resale Gross margin = good sold X 14. Provide relevant appendix and C6 IR 27.76%
in CUP application average can be used to determine
Sales 100 uncontrolled price.
evidence C7 FR 36.01%

CREDITS TO Bojan Radojicic | FOLLOW ON LINKEDIN POWERED BY: WTS TAX AN FINANCE AND