Transfer pricing

What it means

Transfer pricing sets prices in transactions between related parties - companies in one group or linked through individuals. The rule is singular: the price must match what independent parties would agree in comparable circumstances.

It is not only for multinationals. In Slovakia the rules also cover domestic related parties - two companies with the same owner invoicing each other for services or rent, for example.

A transaction is not only an invoice. A service provided free of charge, an interest-free shareholder loan or the free use of another group company’s assets is also a transaction for which the price customary between independent parties is sought. A zero price is still a price, and it has to stand up just like any other.

How it works in practice

The method follows the nature of the transaction: comparable uncontrolled price, resale price, cost plus, transactional net margin or profit split. The choice is justified and supported by a comparability study.

Typical controlled transactions: sales of goods, services, management fees, licences and know-how, loans and their interest, guarantees given. All of it is recorded in the transfer pricing documentation.

When a group sets a cost-plus mark-up for a manufacturing or service company, we compare the actual margin with the agreed range before the year ends. If it falls outside, the true-up is invoiced within the same year so that it lands in the profit or loss and the tax base of the period it belongs to.

What to watch out for

If the tax administrator finds a departure from arm’s length, it adjusts the tax base - and in a cross-border case the other state may tax the same profit as well. So intra-group pricing also takes account of both parties’ tax residency.

Loans are where it most often goes wrong: one company lends to a sister company interest-free or at an off-market rate, and the tax administrator adds the interest an independent lender would have charged on a comparable loan. The error repeats for every year the loan runs, so the additional tax grows with each period.