The purpose of this paper is not to discuss transfer pricing in detail. That would need to be the subject of a separate and far more detailed discussion. However, the issue of transfer pricing is often a key one in determining the effectiveness of the IBC structure.
Simply put, transactions occurring between related companies will be subject to review to determine if the intercompany or "transfer price" relating to those transactions is fair and reasonable. It is a requirement that the companies develop and document a transfer pricing memo or agreement. This should not only outline the transfer pricing that has been determined, but also document the rational for choosing that level.
The best starting point is a comparison to third party examples. If, for example, agency fees in a particular sector are in the range of 5-10%, this is a good starting point for agency services provided by the IBC. In addition, you must take into account what additional services (i.e. international accounting, collection of accounts receivable, etc.) are going to be provided by the IBC.
Additionally, one must take into consideration the impact of the transfer pricing on the profitability of the Canadian company. If the chosen numbers, regardless of third party comparables, strip the Canadian company of all profit, they will in all likelihood be challenged.
Another point to consider is that the Canadian company may well provide some services to the IBC (i.e. marketing). If this is the case, care must be taken not only that this meets the mind and management rules, but that the Canadian company is fairly compensated for those services.
In short, the development of an initial and ongoing transfer pricing policy is a key element in the overall defensibility of an international structure. There is a key role here for both domestic and international advisors to work with the company to ensure that it stays "onside" of these rules. |
