Transfer pricing

Transfer prices are predefined prices at which transactions between related parties are performed. There are three key reasons for the need to define transfer pricing:

• Measuring the actual financial performance of each entity
• Reduction of tax risks and
• Opening up to tax savings.

In the tax system of the Republic of Croatia, which is leaning on the OECD Guidelines, all transactions with related entities that are not in the same tax grade must be made at MARKET PRICES and are therefore subject to verification by the tax authorities.

To prove that prices are market-based, entities conduct transfer pricing studies that elaborate on the application of permitted methods and prove that the applied prices for each transaction are market-based. In the absence of such documents, the tax authorities make an assessment that can be extremely negative for the entities and cause significant tax costs and long-lasting and costly legal disputes thereafter.

Given that the creation of such a document is a highly specialized work that, among other things, may require access to very expensive databases, only the largest entities can independently create such documents while others use the services of experts.

How can you be sure you have tax risk due to transfer pricing?

Given that in addition to the rules we have briefly stated, there are several exceptions and specifics such as tax loss, so it is not easy to describe all cases that may lead to "obligation" to compile a study on transfer pricing, HLB Adria for all entities with related entities offers free one hour consultation to determine the risk of transfer pricing and a recommendation on whether it is necessary to compile a study.

Submit the request for consultation using the online form and we will contact you soon.

If you are connected with a foreign entity, our extensive network of HLB partners abroad will enable us to work with them to view and minimize tax risks for the most complex cross-border transactions.

Are you prepared for a transfer tax audit?

A recent survey of multinational companies found there is a 50% chance of having to defend profits in a transfer pricing examination anywhere in the world. In cases involving adjustments, nearly half the firms reported that transfer pricing adjustments resulted in double taxation.

Transfer pricing is one of the most disputable arenas of international tax. If your firm faced a transfer tax audit, how well would you be able to defend your profits to authorities? Instead, let us help you make transfer pricing part of your strategic planning. Taking a proactive approach to transfer pricing can minimize your company’s local or worldwide taxes, coordinate your business strategy and improve profitability.

Transfer pricing is a dynamic issue. For example, the strict US-initiated transfer pricing model is quickly spreading to other countries world-wide and adding to the strain multinational companies face. An integrated global documentation approach to transfer pricing can help companies successfully compete while minimizing the risk of double taxation.

How can we help with transfer pricing tax optimization?

The HLB Adria transfer pricing experts together (if needed) with the others from HLB network will work with you to develop a transfer pricing strategy suited to your multinational company. Your objectives will depend upon your firm’s overall structure and international tax planning position. For example, if you have significant offshore low-tax manufacturing operations, you may prefer to maximize the amount of income earned by these operations. Or if most of your company’s transactions are between high-tax jurisdictions, it may be more important to minimize the chance of double taxation. Additionally, your HLB team will prepare the documentation necessary to prevent any transfer pricing penalties in the event of an adjustment upon audit.

Your HLB team will assist in defining your strategy, helping you evaluate the many factors affecting your transfer pricing policy – including the dispute resolution forum you prefer. You may choose to resolve potential disputes by obtaining an Advance Pricing Agreement (“APA”), in which case your approach should be tailored to the Tax Authorities’ current APA process. Or if your company expects to resolve transfer pricing disputes through competent authority, your analysis should focus on methods most likely to be acceptable to both sides.

Taking a team approach

Optimizing your company’s transfer pricing strategy calls for a team approach, with your accounting, finance and sales departments working with HLB experts in international taxation and finance. This analytical process includes:

• Clarifying the transaction to be analyzed and confirming that their structure and risk allocations serve your firm’s transfer pricing objectives.
• Preparing functional profit and loss statements for all legal entities involved in the transaction being analyzed.
• Analyzing potential transfer pricing methods to determine which are best for your company’s circumstances.
• Conducting a thorough comparable search both internally and externally
• Reviewing pricing methodologies to select the best method and developing support for the chosen methodology.
• Devising a documentation approach for avoiding penalties.
• Considering the advisability of applying for an APA or a mini-APA.
• Evaluating whether any additional work is needed to defend the transfer pricing methods used in foreign countries.