The ABCs of Transfer Pricing for a Startup

Transfer prices are a required piece of information that must be supplemented each year and which show the regulatory authority in a country that companies are paying the appropriate amount for taxes with respect to the business transactions that take place between related, cross-border entities, such as inter-company loans or centralized cash deposits (cash pooling).

The Transfer Pricing Guidelines on financial operations — as the name indicates — are aimed at regulating inter-company financial operations, so that these are in accordance with the arm’s length principle.

When a startup goes international, there arises the need to analyze, fix and document the transfer prices. Where should I pay the income tax? Since the corporate tax rate is different in each country, it would not be surprising for startups or tech companies to try and keep their earnings in the country with the lowest rate. That is why it is important to understand that implementing a Transfer Pricing policy may determine the profitability of the different entities that make up the economic group. If said policy is correct and effective, it will not only prevent tax-related contingencies, but will also be useful to achieve greater efficiency.

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As pointed out in the summary, transfer pricing documents are prepared or presented annually before the tax authorities of the corresponding countries.  In the case of Argentina, formal requirements are manifold, but other countries in the region (such as Chile) usually establish fewer requirements or require that the reports be prepared but not presented. 

Complying with the presentation of the required information is important because, nowadays, there is a fluid exchange of information between tax authorities around the world. At the same time, numerous countries have decided to follow the recommendations on documents given by the OECD’s 2014 BEPS (Base Erosion and Profit Shifting) Project, which demands the utmost transparency in operations.

Transfer pricing: Where to begin

The general idea is to analyze the company’s situation at a particular moment. Thereafter, it’s best to start by correcting the mistakes (if any) for the future. Prospective analyses are ideal when it comes to thinking about operations with affiliates abroad. The initial analysis will tell you not only the price of the operation to be carried out, but also whether it is feasible or not.

The advantage of analyzing the company’s situation is that it is a worthwhile investment, because the process will be useful when it comes to submitting the pertaining documents. Something to highlight is that the analysis must never be done for each company independently, but must consider the whole group, focusing on the taxpaying duties of both each company and the Group as a whole.

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Why is a good transfer pricing policy necessary?

A transfer pricing policy may determine the success or failure of inter-company transactions. There are many matters which you may be tempted to solve considering only one viewpoint, but our experience has taught us that underestimating or disregarding the transfer pricing question may lead to serious material losses for either party in the international transaction.

Taxpayers who adapt to tax compliance faster and better will have a competitive advantage over those who fail to adapt to the rules of the game.

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