Who should read this article: (1) CEO’s and CFO’s of Medium and Small Enterprise (MSME)* – Local as well as global (2) Start-ups (3) Finance Professionals (4) Accountants and (5) Auditors (* MSME means any company with turnover ranging from INR 10 crores – INR 1,000 crores)
Through this article, I would like to narrate a story to you. A story of black sheep of taxes – namely transfer pricing. The global companies do not like it; Multinationals which uses transfer prices as planning tool are often tagged as being tax aggressive or accused of tax avoidances. Over the past years, this topic has grown mammoth and no country in this world with ethical business practices could afford to ignore the subject. Most of the industry considers the field of transfer pricing to be highly technical in nature and some knowledge that is privileged to a few handfuls in the industry.
You would be surprised to know that the principles and the study of transfer pricing are not just mere compliance or planning a cross border transaction, but could be used in making your operational business finance decision. In today’s world, due to lack of appropriate tools at disposal, most of the business finance decisions are taken by gut feelings of the CEO’s and the management leaders (but without required data on hand). To elaborate the situation better, let me ask you some questions:
- Your business is making a 10% EBIDTA on sales. Do you think this is the right level for your profits? If yes, on what basis did you make a decision on its rightness? If no, what are you going to do about it and how are you going to find about the right levels of EBIDTA?
- Your current recovery period from your debtors is 90 days. Do you think you are blocking your funds in working capital? Are your sales appropriately priced to factor in the interest component on such receivables. Is this an industry norm? Do you have appropriate data with you to determine your relative and generally accepted debtor realisation period in the industry?
- Are your recruitment levels and costs at the right levels as compared to your competitors?
If you have answers to all the above questions, probably you do not need to read further, as you are taking your business finance decision wisely and you have a financial intelligence set in your organization to provide such information to you. However, if you think, that right answers to the above-mentioned questions could yield results to you and your business, you should probably turn your attention to the transfer pricing advisor.
Transfer Pricing advisors are accountants and economists specialising in the areas of taxation and finance, mainly working with the multinational corporation. These advisory firms work on Big Data for the purpose of designing, documenting and building in defence documentation for taxation of a multinational corporation.
Such data, if well interpreted and laid down could act as a strong basis for you and your management to make an informed business decision which could yield you positive results. A transfer pricing competitive and comparable analysis could provide you with comparative data available from the public domain where you would be able to understand the depth about your industry and the trends over the years via an informed report to make informed decisions.
To sum it us, transfer pricing as law and study is not only a home game for the multinational corporations but the principles and especially the Data available for the analysis of transfer pricing could be used to build in financial intelligence in your organization and to seek active comparable data to make informed decisions.
Before, I close, the following are some of the examples where you could use the principles of transfer pricing in combination with financial analysis:
- Determination of right levels of managerial remuneration
- Determination of royalty rate and attached remuneration
- Achieving the right levels of profitability
- Analysing the working capital cycle in an industry
- Analysing the sales potential and trends over the year in your industry
- Setting of sales and growth targets in line with the industry movements
- Implementation of cost control measures through the knowledge of expenditure levels of its competitors
- What are the levels of or trends in marketing spend in your industry
Hope this article has been helpful to you and has given you a different perspective of transfer pricing and how could you use it for building in the business financial intelligence.
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