Hayret Oral, Transfer Pricing and Tax Special Investigation Senior Manager of Mazars Denge, a tax, accounting, auditing and consultancy company, gives advice on transfer pricing, which is generally established to find solutions to any problem and plays a major role in the incorporation and international dimension of startups with rapid growth potential. he wrote it.
What is Transfer Pricing?
Transfer pricing is a tax legislation based on the OECD approach, which is based on the principle of "Arm's Length Principle", which is based on the pricing of transactions between group companies in accordance with their contributions to the group. The sensitivity of tax administrations to the deliberate manipulation of pricing among multinational companies by group companies and to eroding the tax base of the countries is increasing day by day.
Although startups are a fact of today's commercial life, they face issues such as capital, investor and cost pressure. On the other hand, it can catch a very fast growth trend with the investments received and can operate in more than one country rapidly. According to Hayret Oral, Transfer Pricing and Tax Special Investigation Senior Manager from the tax, accounting, audit and consultancy company Mazars Denge, In DueDiligence studies, companies need to create strong (robust) transfer pricing models with experienced consultants in order not to encounter a tax risk that will prevent investment or to face tax administrations in the countries in which they operate in the future.
3 Important Issues for Startups to Avoid Tax Risks
1. SEED INVESTMENT PHASE
For the first time, startups appear before institutional investors in this round. For this reason, it is considered as the stage where the future of the enterprise is determined. At this stage, if an investment is made in the company by a corporate and correct investor, the probability of a successful venture in the following periods increases. However, startups must meet many conditions in order to receive investment from institutional or foreign investors. One of the most important of these conditions is the successful passing of the companies through the special examinations we call “duediligence”. In order to successfully exit the financial and tax duediligence processes, startups are expected to minimize their tax risks before and during the seed stage. In this context, transfer pricing is one of the most technical tax issues.
Startups should consider the following issues in order to create a transfer pricing model according to the current and potential growth business model of the company and to avoid tax risks.
1.1. Value chain analysis and value creation concept
In its basic sense, the concept of “added value” can be defined as the difference between the value of inputs and the value of outputs. Although the concept seems simple and easy to implement in traditional production style, it is difficult to determine the value chain, especially in production processes consisting of high value-added components. Companies today predominantly operate in different countries around the world, undertake high risks, set and implement strategic goals, form highly specialized teams from around the world, and develop market and bargaining power beyond most individuals. Value creation process without a specific definition, transfer pricing analyzes applying OECD directives may conclude that most of the added value is produced in R&D and marketing departments, and little value is attributed to corporate functions. For this reason, it should be taken into account which company undertakes the value-added functions in the transfer pricing mechanisms that can be created in the related transactions between the group companies. In parallel with the aforementioned functions, group companies that undertake the risks and own significant tangible and intangible assets are expected to earn higher returns than other companies.
Another issue that entrepreneurs should consider is that "Post Box Companies/Shell Companies" are now a thing of the past, thanks to the BEPS (Base Erosion and Profit Shifting) Action plans implemented under the leadership of OECD and G20 countries. In the old practices, companies were able to establish sign companies in countries called tax havens and allocate transactions related to these companies. However, in the post-BEPS world, such artificial structures have begun to fade into history and their commercial-economic reasons (Substance) have begun to be questioned in terms of established companies and transactions with them. Therefore, startups need to approach the issue from many angles when allocating companies to be established abroad and related transactions to be realized with these companies.
1.2. Creation and ownership of intangible rights
According to the OECD Transfer Pricing Guide (Guide), intangible rights are defined as assets that are owned and used commercially, that can be transferred by an independent person and are priced similarly, although they are not physical or financial assets. According to the Guidelines, it states that for an asset to be considered as an intangible right, it does not need to be registered or included in the balance sheet of companies. According to the action plan, legal ownership of the company's intangible right will not be sufficient for them to receive a share of the related intangible right. Accordingly, the functions assumed, risks incurred and assets used among the related parties are important in determining the arm's length value to be applied in the transfer of intangible rights between related parties. .
The common feature of startups is that they try to branding for rapid growth by using the technological infrastructure. Since intangible rights such as trademark, patent and know-how are important in which country they are developed and owned, DEMPE functions should be analyzed and in which country the ownership of the royalties should be analyzed. Otherwise, it should be kept in mind that transactions related to the use of royalties to be established between group companies may pose a tax risk. When establishing transfer pricing mechanisms related to intangible rights, startups should take action without ignoring that all transactions will be questioned during investment stages.
1.3. Important person function
While analyzing the transactions between group companies in terms of transfer pricing, another important issue is the issue of which group company the important executives, known as “Significant People Function (SPF)” in the literature, work. By important managers here, it is meant employees who have the capacity to directly affect the sale of the company, such as the founder, CEO (often the founder can be CEO), CTO, Marketing Directors.
Startups are generally established with very few and effective people such as an idea and technical manager, and the number of employees increases in direct proportion to the transaction volume. Although the number of employees increases according to the development of the company, the number of important managers generally remains at a certain number. For this reason, the issues of which group company these people are involved in and which they serve come to the fore. It should be taken into account that the change of a person such as the CEO or CTO will bring about significant changes in the structure of the intercompany transfer pricing. If these people serve more than one group company and an integrated business model is mentioned, profit sharing methods can be used according to the structure of the transaction related to the scoring.