Instructor for this course
more

Global transfer pricing—the price at which an enterprise transfers goods, properties and services to associated enterprises—directly impacts a company’s profitability and tax liability. For this reason, global transfer pricing is under increasing scrutiny as more governments seek to increase their tax revenues.

Taught by transfer pricing expert and finance leader David Galmaski, this course explains the nature and implications of global transfer pricing policy, provides an overview of the OECD and its governing role with global tax authorities, and presents real-world examples of “getting it right,” from a business, taxation, and fiduciary perspective. You also hear the instructor’s first-hand experience with MNEs and the gaps identified within existing policies.

Additional content includes:

  • Life cycle of a global transfer pricing policy
  • Process steps, including functional analysis, business characterization, tax policy and compatibility, comparables analysis, method selection, contemporaneous documentation, and ongoing update and maintenance
  • The current environment with respect to revenue audits and transfer pricing audits
  • The potential legal and tax exposures resulting from a faulty transfer pricing policy as well as the risks of potential double taxation.

 

Intro Video Transcript

I'd like to welcome everyone to this course on global transfer pricing. The title of the course is OECD Global Transfer Pricing: Part 1, Policy Development, Implementation, and Documentation.

Before we start, I'd like to give you a little bit of background on myself. My name is David Gamalski. And I've had extensive experience in the development and implementation of global transfer pricing at a number of large global multinational enterprises. I'm a CPA. I'm a CGMA, a CTS, certified transfer pricing specialist. And you're welcome to learn more about me and my practice at dagfinance.com.

So getting into the course, what is global transfer pricing? Global transfer pricing is, simply stated, the price an enterprise transfers physical goods and intangible property or provides services to associated enterprises. So you may have a legal entity in Germany that purchases assemblies/sub-assemblies from a factory in China. Or you may have a legal entity in France that receives corporate services from a parent in the United States.

The important point is that the prices a legal entity pays for assets, goods, or services directly impacts their profitability and, in turn, their tax liability. Obviously, the lower price paid by a legal entity for a particular good or service will raise its income and the income taxes of that entity. And conversely, the higher a price for a good or services paid by a legal entity will lower their income and income taxes. And it's for this reason that its becoming such a hot topic is that, globally, more and more attention is being paid to transfer prices because their significant interest on the part of governments around the world to enforce and collect their tax revenue.

So a little bit of background on global transfer pricing. For the most part, up until I would say the year 2000, transfer pricing was simply the sum of direct cost with some variable overhead and maybe some kind of markup applied to those costs. Rarely was there any consistency between supply units, production units, assembly units globally. Sometimes new products, new factories would calculate their transfer prices differently. Certain more mature companies or more mature factory locations would have different prices. Oftentimes, and I've seen this quite a bit actually, is incentive plans or regional management influence the prices paid or charged to related entities, legal entities. Certain factories may have a high profit parts sold to a related party. They're reluctant to reduce that transfer price because it may impact the perceived profit of their business unit and, in turn, may impact their incentive plans.

Many companies are still operating using these antiquated approaches. And it's becoming more and more dangerous to operate this way. And as we'll learn as we go through this course, there's certainly potential liability and potential tax penalties to be paid. So before we get into the details, I want to talk a little bit about the OECD. This is a global body that was created in 1961. And their charter is to help ensure economic growth globally, improve standards of living for its member states, to create a sound economic expansion, and, importantly, to do it on a non-discriminatory basis, so in equal playing field, so to speak, among member countries.

So currently, there are 34 members. And as you'll notice on the listing here, most of the large global economic powers are represented here. A few are absent. China, for example, is not on the list. But you'll notice that most of the large global trading partners are included on the list. The United States of course is one of them.

The member countries have agreed as part of the treaty is to rely on the OECD guidelines as a basis for resolving matters in dispute. The guidelines themselves are very lengthy, several hundred pages, great detail. They've been updated twice. They were originally published in 1979 and have been updated in 1995 and in 2010.

It's important to note that the guidelines themselves don't have any direct legal force unless they're adopted into domestic legislation. What member countries do do is they will reference the guidelines in their revenue rulings. So although it's not law per se, they are relied upon by the revenue agents in their examinations and in their rulings.

So if we look at transfer pricing, what is the underlying principle that the OECD follows? What is its underlying philosophy? Well, its underlying philosophy is that transfer pricing should be an arm's length price.

And what we mean by an arm's length price, of course, is what an entity would pay to an unrelated party for any given product or service. The transfer price should be a price that reflects a fair return for the activities carried out, the assets used, and the risks assumed in carrying out these activities. So a legal entity that employs significant assets assumes risk of loss on inventory, price changes on raw material. They would be entitled to a higher price than a legal entity, let's say, that would simply distribute the product to the end customer.

Now, ideally, we would like to have market-based transactions that were identical to transactions between legal entities within the same M&E. Of course, that's not always possible, reason being is that the products themselves may not be complete products. They may be unique services and so on. So recognizing this, the OECD has allowed five alternative methodologies. And it's these methodologies, as we learn later in the course, this course and the subsequent two courses, are what need to be documented and designed in accordance with the economics of the underlying business.

So the first method, allowable method, is the Comparable Uncontrolled Price Method or the CUP method and, generally speaking, the price charged to an unrelated party for the same product. So if there's an unrelated party and we are able to identify the similar product or identical product, certainly, that is the preferred pricing approach, the CUP Method.

The second method is the Resale Price Method. And with this, we work backwards from the final sales price, deducting the value-added of each participant in the value chain.

The third method is the Cost Plus Method. And with this method, we add appropriate markup to the cost of production. And it varies by the nature and degree of the manufacturing process.

The fourth method, the Transactional Net Margin Method, this looks at the net profit relative to an appropriate base that a taxpayer makes from a control transaction, could be either costs, sales, or assets. The profit level indicators, or PLI's, that are typically applied include return on assets, return on sales, and a function called the Berry ratio for distributors, which we will get into in the third part of this course.

And the last method is the Transactional Profit Split Method, and the profit split as it would be in an independent enterprise, in a joint-venture type relationship.

And we will talk more about these five methods in detail with examples of each as we go through the course.

 

Learning Objectives

  • Define the role of the OECD and it’s authority in governing transfer pricing policy globally.
  • Assess participant’s current transfer pricing policy against the 5 allowable OECD alternative methodologies.
  • Evaluate the risk of double taxation and how to calculate the financial impact.
  • Articulate the 7 steps of the transfer pricing policy development cycle.

 

 

 

Last updated/reviewed: September 18, 2018

21 Reviews (77 ratings)Reviews

5
Member's Profile
Great class on transfer pricing. The instructor was great. He explained this complicated subject in a way a person not familiar with transfer pricing can understand. For those with some experience, there were materials that we were not aware of. I almost feel like I can take the resource material and work on creating transfer pricing and policies!
4
Anonymous Author
Great overview of transfer pricing. I had never heard of the OECD -­‐ Organization for Economic Cooperation and Development. Though I am glad that they have issued guidelines governing transfer pricing and that many countries worldwide are members. .
5
Member's Profile
The instructor has broken down the transfer price policy development process in a way that helps demystify this topic in my mind. I also like his cycle illustration near the end of the course - it helps drill into my head that this is an ongoing process.
4
Member's Profile
The slides are quite short compared to other presenter but yet contain relevant information. Since the presenter really elaborates a lot on the points given on the slides, it will be better to have a transcript for better reading and understanding.
5
Member's Profile
This course provides a nice introduction to transfer pricing including a basic outline of transfer pricing policy and covering the importance of developing and maintaining a transfer pricing policy.
5
Member's Profile
Good overview of transfer pricing policy, development and governance of that policy, and the risks of poorly implemented transfer pricing.
5
Anonymous Author
Thanks for the course. Well explained and well presented. I a very helpful course to understand transfer pricing in a better way.
5
Member's Profile
A detailed look at transfer pricing, as well as policy safeguards to employ to avoid the pitfalls of double taxation.
5
Member's Profile
This course was a good intro to TP. A few more illustrative examples may have been more helpful.
Member's Profile
Good course for introductoin. would like to see further course development to the higher level.
3
Member's Profile
good overview, however was looking for specific examples with mathematical calculations
3
Member's Profile
Nice overview. Could have included more examples / discussion on the key topics.
4
Member's Profile
The detailed example slide did not show when viewing the course (XYZ Co.).
5
Member's Profile
Excellent overview of a challenging topic. Well presented.
4
Anonymous Author
awesome we need to see sample of documentation
5
Anonymous Author
Good easy to remember summary of key points
5
Member's Profile
Good introduction to an important topic.
4
Anonymous Author
Nice overview of a complex subject.
5
Member's Profile
Great course! Very informative.
5
Member's Profile
Very well done!
4
Member's Profile
Good

Prerequisites

Course Complexity: Advanced

Prerequisite: Experience with corporate income tax and a basic knowledge of international tax and exchange between legal entities within a Multi- National Enterprise

 

Advanced Preparation: None

 

Education Provider Information

Company:
Illumeo, Inc., 75 East Santa Clara St., Suite 1215, San Jose, CA 95113
Contact:
For more information regarding this course, including complaint and cancellation policies, please contact our offices at (408) 400- 3993 or send an e-mail to .
Course Syllabus
INTRODUCTION AND OVERVIEW
Policy: Development, Implementation, Documentation
  8:23Current Environment and Risks
  7:02Transfer Pricing Policy Development
  6:15Steps for Developing a Transfer Pricing Policy
Change Management
  11:20Managing Change to a TP Policy
Full Cycle and Conclusion
  8:57TP Process Development Cycle and the Benefits of Doing It Right
Continuous Play
  52:35Global Transfer Pricing Part 1: Policy Development, Implementation and Documentation
SUPPORTING MATERIALS
  PDFSlides: Policy Development, Implementation and Documentation
  PDFPolicy Development, Implementation and Documentation Glossary/Index
REVIEW & TEST
  quizREVIEW QUESTIONS
 examFINAL EXAM