Transfer pricing can help grow your business internationally

The latest edition of Santander Trade Barometer reveals that nearly a third (28%) of UK domestic businesses are planning global expansion within the next three years, marking the highest level in two years. Additionally, 56% of businesses in the US, 39% in Spain, and 38% in Poland are also contemplating cross-border expansion.

Entrepreneurs are going global. They are seeking growth opportunities and aiming to tap into new markets. Foreign expansion is a crucial part of the development strategy for many. Small family businesses often grow into thriving, large enterprises, and more companies are founded. What should you keep in mind?

Transfer pricing helps to expand local business in foreign markets

Why? Because transfer pricing regulations govern all cooperation between related parties, typically operating within a single group. Transfer pricing is primarily an international issue, which will help you safely scale your business into any foreign market.

How? By making conscious decisions and building a replicable structure for subsequent markets.

What should you consider in the context of transfer pricing to ensure successful foreign expansion and avoid tax risks?

1. If you plan to open new companies abroad, establish the intra-group transactions necessary for the smooth operation of the business.
2. For each of these transactions you need to:

• identify the role and activities that will be performed by each entity,
• identify the assets that the entities will engage. Also, determine whether there will be unique assets involved: these determine the success of your venture,
• define the risks to be borne by the transacting parties and determine how market risks will be shared between them.

3. Plan a remuneration model that best aligns with the functions performed, assets involved, and risks incurred in these intragroup transactions. This model should establish the appropriate arm’s length remuneration or profit allocated to each party involved. It should also be supported by relevant transfer pricing analyses.

Additionally:

4. Develop a Transfer Pricing Policy that outlines the established model of cooperation within the group and the method of remuneration.
5. Ensure that the cooperation agreements between the parties to the transaction include provisions that align with the established model and the applied transfer pricing policy.
6. Develop a process to monitor the related party settlement model, assessing its practical application and determining if adjustments are needed to align with evolving business dynamics.

Intra-group settlement model – an example of a successful expansion

One of our clients, a Group with a turnover in the billions, aimed to sustain its dynamic growth while pursuing global expansion strategy. They required a settlement model for all intra-group transactions across over a dozen markets, both within and outside the EU. The model needed to ensure security and stability while maintaining flexibility to support ongoing growth initiatives.

We implemented the project centrally, while also collaborating closely with local advisors. Our goal was to ensure compliance with local regulations regarding transfer pricing adjustments.

The result? Our model has proven successful over the years, passing inspections both in Poland and internationally. It includes three advance pricing agreements (APA) with the Minister of Finance, including two bilateral agreements. It has demonstrated resilience through challenges such as pandemics, high inflation, and the war in Ukraine, not to mention local market adversities. It remains stable and flexible, enabling the Group to sustain an average annual growth of around a dozen percent, despite its vast scale and multi-billion-dollar entry turnover.

Fully international model – we can help!

To effectively expand internationally according to the established model, consulting with experts is crucial. Hire professionals who have extensive experience and access to current tax knowledge and case law in your target expansion markets. You need a trusted partner that can navigate regulatory TP environment.

At MDDP, we leverage over 10 years of experience in developing international models that span numerous markets. We collaborate with specialized partners who focus on transfer pricing issues across various countries worldwide. Our transfer pricing models are always aligned with the specific requirements and practices of each country.

We provide comprehensive services to entities planning business development, as well as to established groups and their operational models. We will assess your model to identify potential tax risks and recommend necessary adjustments and additions.

We are delighted to share our expertise and experience, offering guidance and support to help you expand your business abroad in a tax-efficient manner!