The transfer pricing policy is a set of consistent and transparent rules on how to carry out transactions (esp. how to set a price) between related entities.
The transfer pricing policy covers the principles that are followed by related entities in the process of determining the terms of the transaction. It therefore differs much from the local file which describes transactions already made.
Related entities may carry out dozens of similar or identical transactions. After the implementation of consistent rules governing intra-group transaction it is much easier for them to (1) determine the fair market value, (2) comply with documentary obligations and (3) protect their interests in the event of tax audit.
Benefits of preparing transfer pricing policy
The benefits of preparing a transfer pricing policy include:
reduction of the workload of preparing reports and tax documentation;
consistent use of calculation methods;
implementation of schemes accelerating the process of transaction execution, as well as other decision-making processes;
The transfer pricing policy usually includes:
description of the related entities (including ownership structure, core business, products, functions performed);
description of the intra-group transactions and agreements;
description of the methods for calculating the price/costs of the intra-group transactions;
rules for making profit adjustments (true-up);
description of the group’s economic strategy and goals;
description of other factors affecting the transfer price.