Internal transactions within a company are generally settled with transfer pricing. In this regard, companies do not necessarily orientate themselves towards market conditions when determining the transfer price, i.e. supply and demand have no bearing for the most part; rather, the price is geared to and optimized for the business objectives. Transfer pricing then becomes relevant for tax law purposes if there is a (cross-border) exchange of services between associated companies. In cases with a foreign element, one also speaks of transfer prices.
In principle, deliveries and services between associated companies must be accounted for pursuant to the arm’s length principle as between independent market operators. The competent fiscal authority has several possibilities for reviewing the appropriateness of the agreed transfer prices. Either it uses a price comparison method, according to which the transfer price is compared with the current market prices, or, within the framework of the cost-plus method, the usual profit margins are added to the costs of the supplying company and the result is drawn upon for comparison.
If the outcome of the review by the fiscal authority is that the transfer prices are inappropriate, the profits are re-calculated having regard to adequate prices. Transfer prices are increasingly being examined in external audits, resulting in significant adjustments to income. This will intensify over the coming years through the transposition of the EU Mutual Assistance Directive into national law by means of the Act of June 26, 2013, which improves transnational cooperation between fiscal authorities across Europe.
The wellbeing of the company and the associated businesses is at the forefront of day-to-day business operations. Operational concerns, for example supporting financially stricken subsidiaries, often necessitate setting transfer prices below the market price. However, tax regulation does not in principle allow for exceptions. Tax advisors and lawyers can support you in an advisory capacity both when assessing and reviewing transfer prices as well as in the event of any measures being taken by the fiscal authority.