Transfer Pricing Risks for Growing Small Businesses
The time has finally come. After a lot of hard work, blood, sweat and tears your company is finally ready to go international. This is a huge step for any company that will bring a lot of new opportunities, however, while you are wrapped in the excitement do not lose sight of the new challenges and requirements that come with expanding your business beyond your initial borders. There are the somewhat obvious considerations to take into account like cultural differences, language barriers, local competition, etc. but one aspect that businesses, especially small enterprises, on the trajectory to becoming global powerhouses sometimes forget, is transfer pricing.
When most entrepreneurs, start-up or small business owners think transfer pricing they see it as something that only the “big shots” in their industries have to worry about. If you are in a position to grow your business into new territories, however, you not only need to start thinking like these larger corporates that you aspire to be like, but you also need to start acting like them and ensuring that even in the earlier stage of your business journey, you are running your company properly and everything is above board, including how you manage your transfer pricing.
Stated simply, transfer pricing is how much one entity charges another entity in the same organisation for a product or service. The aim of accounting rules around transfer pricing is to make sure businesses correctly represent their income and profits. Regulations for transfer pricing vary from country to country and from region to region so understanding them can be a bit tricky, especially if you have never had to deal with it in the past. As much as it may take time to get the grasp of it, however, if you are looking for cross border opportunities, it is something you will eventually have to manage. Transfer pricing is a key part of ensuring your organisation is compliant, particularly with regards to taxes which is often the main area of focus for business owners when it comes to the topic, however, beyond compliance reasons transfer pricing is also key for your small business’ viability.
Mispricing can lead to a number of internal risks, which could negatively affect your success within the new territories you have ventured into, particularly when it comes to decision making. All business decisions should be informed by data and it is vital that the information guiding those decisions is accurate and reliable. If information such as transfer pricing is incorrect then decisions based on that data will likely be incorrect too. For example, since transfer pricing is meant to be a reflection of market prices, getting it wrong could lead to misunderstanding market conditions and not having a well-informed understanding of your market can have massive negative effects on your business in terms of how you then choose to position it and how you can remain competitive.
Additionally, inaccurate transfer pricing could distort the financial performance of your entities. For example, an entity could appear to be performing worse or better than it actually is due to distortions in its income or expenses caused by flawed pricing. This could result in resources being invested to find problems in other areas of the business that actually may not exist, or it could result in entities continuing down the wrong path because real issues are being masked by seemingly good profits which are not a true reflection of reality. Such misrepresentations could also end up costing you more on your tax bill as well.
It can be a daunting task to understand transfer pricing and get it right, not just for the purposes of answering to the tax man but also for ensuring that you make optimal decisions for your business. Fortunately, you do not have to figure it all out on your own. With partners like Baker Tilly on your side you can get the benefit of side-stepping all the transfer pricing pitfalls of venturing into new countries and you get access to a pool of global expertise; in other words, you would be in great hands. As a business your success abroad depends largely on your ability to band together the right resources and an advisor with relevant international experience will be key part of that. Expanding internationally is a major leap, and for all the resources and effort that go into it, the last thing you want is to risk failure over something that could have been easily avoided.