How Remote Working can be Impacted by Transfer Pricing Tax Rules
Watch the stream on transfer pricing tax rules on 2 August.
Transfer pricing refers to the process through which prices are set for the sale of goods and services between related companies, typically located in different countries. In essence, it is the pricing of transactions between connected parties, based on the internationally recognised arm's length principle.
This principle seeks to determine what the price would have been if the transactions had been carried out under comparable conditions by independent parties. It is a strategy that companies use to reduce the overall tax burden of the parent company, sometimes shifting profits to low-tax jurisdictions while minimising profits in high-tax jurisdictions.
However, transfer pricing is subject to strict scrutiny by tax authorities worldwide, especially if individuals are operating Personal Service Companies while contracting from a second tax residency. This scrutiny arises from concerns that businesses might manipulate transfer pricing to their advantage, thereby evading fair taxation. In such instances, tax authorities could apply transfer pricing rules, leading to additional tax implications.
Global Changes to Transfer Pricing Regulations
In the UK, changes to the documentation required by the tax authorities (HMRC) took effect from April 2023. The changes apply to companies with a turnover (T/O) greater than £750 million. Unlike the current rules, the UK's new laws mandate a standardized approach to transfer pricing. This includes preparing a Master File, which provides an overview of the group’s business, the nature of its operations, its value drivers, its transfer pricing policies, and its global allocation of income and economic activity. Moreover, the legislation requires Local country files, which contain details of material intra-group transactions for the local taxpayer for the year and the supporting pricing analysis for each entity.
Similarly, in Cyprus, the new laws take effect from 2023 for companies with a turnover greater than €750,000. Here, Article 33 of the Cyprus tax law plays a significant role. It allows tax authorities to adjust and regulate transactions between related parties onto an arm's length basis if the terms differ from those which would apply to similar transactions between independent enterprises.
Incentives for Employment in Cyprus
Cyprus offers tax incentives to individuals seeking first employment in the country. As per the new provisions of the legislation introduced on 26 July 2022, individuals with an annual remuneration lower than €55,000 will be eligible for a 20% or €8,550 exemption (whichever is lower) from their employment income, for a maximum period of seven years.
Comparable Uncontrolled Price (CUP)
When transfer pricing is scrutinised, one of the most reliable methods is using the Comparable Uncontrolled Price (CUP). The CUP method establishes a price based on the pricing of similar transactions that have taken place between third parties. It is one of the most difficult methods to challenge due to its objectivity and direct comparison with market prices.
Characteristics of Good Transfer Pricing
Effective transfer pricing should ensure divisional autonomy between enterprises, maintaining goal consistency and transparency. Companies should also maintain comprehensive documentation to support their transfer pricing policies and strategies. Moreover, the policy should aim to minimise the company's global tax liability while complying with all relevant laws and regulations.
Personal Service Companies and Transfer Pricing
From a ProACT perspective, we primarily focus on personal service companies or related businesses working across borders. Navigating the complex landscape of transfer pricing requires detailed knowledge of international tax laws, an understanding of the company's global operations, and a well-thought-out strategy to minimise tax liability while remaining compliant with local and international regulations.
In conclusion, transfer pricing is a complex, dynamic, and critical aspect of international business. Businesses and individuals operating across borders must stay abreast of changes in local and global regulations to ensure compliance and maximise their financial efficiency. Effective management of transfer pricing can play a crucial role in a company's global operations and financial success.
Further reading
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