International settlement – global and local perspective of TP – what to keep in mind?

The main principle of the game is the same

International groups can manage the topic of transfer pricing in two ways – centrally and locally. Regardless of the choice of approach, the basic principle of transfer pricing remains the same. We are talking about the arm’s length principle, according to which settlements between related parties should be carried out on the basis of terms that unrelated parties would agree to.

This principle globally is well established in the OECD Guidelines, but has also settled into the local laws of global jurisdictions. Thus, the essence of international accounting from a transfer pricing perspective is based on ensuring marketability both globally from the perspective of the entire group and locally complying with tax regulations from the perspective of each group company. To this end, transfer pricing analyses by international groups are used. Importantly, two approaches can be taken when preparing them, i.e. a local approach, using only local comparables as comparables, or a global approach, taking into account international data.

Is the global approach safe?

If a multinational group operates in several jurisdictions and conducts global intragroup transactions, a global approach is more than likely to be used. However, in practice, we often encounter the preparation of stand-alone analyses, separately for each jurisdiction.

Many taxpayers also have concerns that the use of a global approach could be challenged by authorities. Meanwhile, the OECD Guidelines directly indicate that foreign comparables should not be automatically rejected simply because they are not domestic.

Additionally, based on information published by the OECD, almost 60% of the world’s jurisdictions according to OECD statistics do not declare a preference for local comparative data over foreign data. Instead, 40% of jurisdictions lean toward local comparative data mainly because these data should be the most comparable in principle, but it is stressed that everything depends on specific circumstances and is subject to individual evaluation. This means that foreign data is also accepted.

Global approach – what to pay attention to?

When deciding on a global approach when preparing comparative analyses, it is important to keep in mind that the range of market conditions affecting international transactions is much broader than those affecting domestic transactions.

Price formation in individual foreign markets may depend on, among other things:

• geographic location,
• country risk (country risk),
• The size of the market, the competitive environment and the level of supply and demand,
• The nature and scope of legal regulation of the market,
• Production costs, including labor and capital costs.

Therefore, when planning global benchmarking, it is necessary to analyze the impact of the above factors on the transaction under study, as well as to ascertain the approach represented by the tax authorities of all countries under review.

Global analysis seems most reasonable for international settlements when, for example, the parent company provides support services to many foreign group companies. On the other hand, a different approach is required for a transaction carried out, for example, by a Polish entity, which is affected by the conditions and peculiarities of the local market, and access to local comparative data of good quality outweighs the benefits of global analysis.

Knowledge backed by experience

Our team is made up of experts with many years of experience in supporting international group entities. Examining the marketability of cross-border settlements is therefore our daily business. We are able to serve not only Polish entities, but also offer services at the central level. Our knowledge is supported by experience in working on international databases such as TP Catalyst, Bloomberg, and Royalty Range.

Wondering if a global approach is possible in your case? We would be happy to share our knowledge and experience – feel free to contact us!