Many Irish SMEs overlook transfer pricing but as Gavan Ryle explains, getting it right early is crucial for tax efficiency, compliance and successful global growth
Transfer pricing is the process of setting prices for transactions between related parties, typically involving the exchange of goods, intangibles, services or finance between one group of companies and another.
Many small- and medium-sized enterprises (SMEs) in Ireland may think that transfer pricing is only relevant to large multinationals, but this is not the case.
Once Irish companies begin to trade in different jurisdictions, their transfer pricing policy will play a key role in determining the profits or losses recognised in each one.
This presents an opportunity to optimise tax savings. It also carries risk, however, where transfer pricing audits handled incorrectly give rise to unnecessary costs.
Relevance for Irish SMEs
Transfer pricing is particularly relevant to Irish SMEs because so many begin exploring overseas opportunities at an early stage.
Ireland is a relatively small market, so growth-oriented Irish companies often begin exporting or expanding overseas at a far earlier stage than their international counterparts.
This very quickly gives them a taxable presence in foreign jurisdictions, which typically have corporate tax rates well in excess of 12.5 percent.
These firms must plan for how they will be taxed in these locations and how to manage their overall effective tax rate.
A scalable transfer pricing model can offer Irish SMEs expanding abroad a significant advantage from the outset.
First steps and planning ahead
As with so much else in business, it is crucial to plan ahead—in this case, by putting a transfer pricing policy in place.
The process of setting prices for related-party dealings cannot be handled arbitrarily, and must be implemented in the same way as if the parties involved were not related.
The price charged between related parties—and the method of arriving at this price—should be very similar to that which would apply to an unrelated party.
The emphasis should be on the functions performed, assets owned and risks borne by each affiliate in the business.
It is important to look at the entire value chain, from research and development (R&D) through to production, distribution, sales and marketing and business support functions. The business will need to fully appreciate where executive decisions are made.
A properly structured and fair transfer pricing policy is an investment in the longevity and success of your business.
It can help to ensure that your pricing strategies are robust and adaptable, meeting your current needs while also preparing you for future challenges and opportunities.
Whether you are navigating complex deal room negotiations, undergoing a tax audit, or planning to expand your business model into new territories, a well-crafted transfer pricing policy will help.
As your business continues to grow
While it is crucial to take a long-term view when setting your transfer pricing policy, it is equally important to get it right at the outset, notwithstanding the cost involved.
It may also be necessary to revisit your policy as your business scales, ensuring it remains fit for purpose. Consider the impact of events such as acquisitions, expansion into new territories, or the appointment or relocation of key senior leadership roles.
Remember, formal Irish transfer pricing compliance rules will take effect once the consolidated group turnover exceeds €50 million.
Risks and opportunities
Tax authorities at home and abroad have increased their efforts to ensure companies comply with transfer pricing rules.
An incorrect or poorly designed transfer pricing policy may lead to lengthy and costly tax audits with potential penalties, depending on the facts and circumstances.
Increasingly, SMEs are seeking external funding to implement business strategies.
Having a robust and effective transfer pricing model in place as you navigate funding rounds can be highly advantageous in conveying the value of your enterprise.
Gavan Ryle is a Partner at PwC Ireland
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