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Founders and leaders think in terms of their business, but accountants, lawyers and tax consultants think in terms of entities.

More and more businesses need multiple entities in multiple jurisdictions in order to access key markets, hire the best talent, and secure funding.

Your business, crudely, comprises employees, contractors, assets, liabilities, customer contracts, and supplier contracts. Each of these must be ‘held’ by an entity (or across multiple entities). The entity in which you place each of these has profound consequences for:

1. how easy it is to operate your group ⌛
2. how risky your structure is, and 💣
3. how much corporate tax you will pay. 💸

Downstream of these decisions is ‘transfer pricing’. Mishandling your transfer pricing can create significant risk that chips value from a business and drains leadership time if not handled properly.

It can also affect other important areas, such as the value of your R&D claims.

Overview

A ‘transfer price’ is any price charged between entities in the same group (or technically “under common control”).

To prevent tax avoidance, there are rules governing what transfer prices are permitted when the transactions affect an entity’s taxable profit. The transactions that can affect an entity’s profit are generally as follows:

• sale of goods;
• provision of services;
• license of IP; or
• charging interest on a loan.

It should be clear to see how varying the price charged for any of the above would change the profit an entity earns and, therefore, how much tax it has to pay.