How Transfer Pricing Can Improve Your Cash Position During the COVID-19 crisis – Tips #3
The Netherlands is currently going through a second wave of COVID-19 infections. The government was forced to increase the restrictive measures in the Netherlands to limit the number of new daily infections. Stricter measures will inevitably affect businesses. Some industries may flourish, while other business have to endure another heavy hit.
Especially the latter category of companies may be struggling to keep cash within their business. While other measures may spring to mind sooner than transfer pricing, transfer pricing should not be overlooked. The sooner you find time to consider how transfer pricing may help you keep money within your business, the better it is.
In the last part of this three part article, we again share two tips with you that may help you to keep cash within the business. The first of today’s tips may help you generate tax savings. While the latter tip is more a precautionary attention point you should take in mind to avoid more cash possibly leaving the business unexpectedly in the near future.
See our previous tips:
Monitoring your transfer pricing throughout the year may save you VAT or customs duties
Monitoring your transfer pricing throughout the year is generally advisable, even without a crisis. If you have not done so yet, now may be a good time to start a good habit.
Monitoring your intercompany prices throughout the year, also called operational transfer pricing, may save you VAT or customs duties in certain situations.
A VAT impact may exist in situations where goods or services are transferred between related parties, if one of the parties involved is not allowed to fully deduct input VAT. Year-end adjustments can often not be charged with VAT because the adjustment is not retraceable to individual products.
The same applies to customs duties. Year-end adjustments for transfer pricing will generally not lead to an adjustment of the price for customs purposes. If, in hindsight, the price for customs purposes was set too high, you are unlikely to be able to recover overpaid customs duties.
Adjusting your prices accordingly may therefore prevent unrecoverable VAT and customs duties.
Review the effects of government support on your transfer pricing
Although this won’t save you cash directly, it will save you trouble. Which can in itself prevent expensive advisory fees and penalties as well.
Our advice is that you carefully consider the effects of your transfer pricing policies in light of any government grants that have been provided. More specifically you need to make sure that any government grants received are not exported abroad as a result of your transfer pricing policy.
This point is clarified based on the example of X.B.V. below.
When applying this transfer pricing policy, the group should make the adjustment as if the government grant was not provided. Because if the government grant is not excluded from the transfer pricing analysis, the grant will end up being exported abroad. The below numerical example highlights this effect.
|X B.V.||2020 (no grant)||2020 (grant)|
|Sales||€ 7,000,000||€ 7,000,000|
|Total Costs||€ 8,600,000||€ 7,600,000|
|EBIT||€ -1,600,000||€ -600,000|
|Transfer pricing adjustment|
|Transfer pricing adjustment amount||€ 1,950,000||€ 950,000|
|Adjusted EBIT (5% of return on sales)||€ 350,000||€ 350,000|
In the left column we see the effect without the grant. The company is bound to make a loss of € 1.6 million. To ensure that X B.V. reports a 5% return on sales, a transfer pricing adjustment of € 1.95 million is made.
In the situation in the right column, a grant has been provided by the government, lowering the costs of X B.V. by € 1 million. This lowers the loss, prior to the transfer pricing adjustment to € 600,000. If the grant is not taken out of the equation prior to calculating the needed transfer pricing adjustment, the effect is that the transfer pricing adjustment is also lowered by € 1 million.
This is likely to cause problems, especially when the company providing the adjustment is not located in the same country. From the local government’s perspective, taxpayer’s money has now been spent to effectively subsidize a foreign company. Government authorities will likely find this to be an undesirable outcome and will combat it. Therefore, it is good practice to take any government grants out of the equation prior to making transfer pricing adjustments.
Interested in more tips like these? Read our full article outlining all the transfer pricing tips from the previous weeks.
If you found these tips valuable and want to know more about the chances that transfer pricing offers for improving your cash position during the current economic downturn please feel free to contact the transfer pricing specialists at Crowe Peak. We’re here to answer any questions you may have.