How intercompany recharges affect transfer pricing for multinationals – Business Daily
Intercompany recharging is a hot topic in the transfer pricing landscape, and such recharging is necessitated by the centralisation of functions within the group or through intragroup financing to support operational costs. FILE PHOTO | NMG
It is normal for multinational companies to centralise some functions by having a few staff perform or procure some services or goods on behalf of the whole group. Subsequently, the costs incurred by the central entity are recharged to the respective beneficiary entities in the group. This is known as intercompany recharging.
Generally, intercompany recharging is a business model to reduce costs. For example, centralised procurement of goods results in better pricing and payment terms given larger bulk purchases.
However, intercompany recharges can also arise where one company in the group assists its related party in settling operational expenses such as salary expenses, inventory purchases, insurance covers, and recharge the benefiting party at cost without markup, thereby creating a receivable from such entity.
Either way, intercompany recharging is a hot topic in the transfer pricing landscape, and such recharging is necessitated by the centralisation of functions within the group or through intragroup financing to support operational costs. Therefore, a critical question to ask is, at what point does intercompany recharging become a transfer pricing issue?
Where the recharging results from the centralisation of functions, transfer pricing issues hinge around three main areas: whether the said intragroup services have indeed been rendered; whether the provision of such services has conferred an economic benefit or commercial value to the business that enhances its commercial position; and whether the recharged costs conform to the arm’s length test.
Failure to demonstrate any of the above facts may result in corrective adjustments by the revenue authorities, including disallowing the recharged costs for income tax purposes. Therefore, it is important to ensure intragroup recharges are aligned with the domestic transfer pricing rules and guidelines.
If recharging results from intragroup financing of operating costs, then a comprehensive look into the circumstances of the recharge of expenses would need to be done to determine if there is a transfer pricing exposure.
Matters such as the timing for the payment of the receivable created through recharged expenses would also need to be assessed.
The writer is a Senior Associate with KPMG Tanzania.
