Startup Office

Transfer pricing refers to the pricing of transactions between different entities within the same company group, particularly across international borders. These transactions can include:

For most early-stage startups, transfer pricing isn’t a concern. However, as you establish international subsidiaries or work with overseas parent companies, transfer pricing can come into play. Transfer prices show the regulatory authorities in the countries where you do business that you’re paying the appropriate amount of taxes on any business transactions between your company’s related cross-border entities.

Why transfer pricing matters for startups

Managing your transfer pricing is important for several reasons. One of the biggest is that your transfer pricing affects the amount of taxable income you record in each jurisdiction. Mistakes in your transfer pricing could lead to your startup having unnecessary taxable income in one jurisdiction, while showing losses in another. Other reasons include:

  • Tax compliance. Tax authorities are increasingly scrutinizing cross-border transactions to make sure companies aren’t manipulating prices to shift profits to low-tax jurisdictions.
  • Fundraising. As your startup grows, potential investors will examine your international structure and pricing policies.
  • Cash flow management. Proper transfer pricing helps you make sure the right amount of cash is held in each country where you operate.
  • Scalability. A solid transfer pricing strategy supports your startup’s international growth.

Important transfer pricing considerations for startups

Again, transfer pricing doesn’t affect a lot of early-stage startups, but if you’re considering expanding internationally, you need a transfer pricing policy. In fact, having transfer pricing in place is a tax requirement in a lot of countries. US companies with foreign affiliates are required by the IRS to report international activity on Forms 5471 or 5472 when filing their tax returns. The IRS often uses those forms to identify companies that could get transfer pricing audits, so you need to have your documentation ready.

If you’re establishing cross-border transactions, you should:

  • Plan ahead. Implementing proper policies early can save you headaches down the road. If the IRS does flag your company for an audit, you’ve got a limited amount of time to provide them with the appropriate documentation.
  • Document your approach. Maintain detailed documentation of your transfer pricing methods. This is crucial for defending your practices in case of an audit. There are different methods to establish transfer pricing, so you’re going to want to consult a transfer pricing specialist to help with the process.
  • Understand local regulations. Transfer pricing rules vary by country. Make sure you’re compliant with regulations in all jurisdictions where you operate. Again, it’s a good idea to get professional support from a transfer pricing specialist.
  • Review your transfer pricing regularly. As your startup grows and evolves, and market conditions change, you should adjust your transfer pricing policy.

Taking your startup global

Expanding your startup across borders can provide opportunities for growth and new markets, but founders need to be aware of the impact of transfer pricing. While transfer pricing may seem confusing, it’s an essential consideration for internationally expanding startups. By addressing it early and seeking expert guidance, your startup can successfully navigate the challenges of cross-border business.