Transfer prices

We cannot talk about the calculation of transfer prices if we do not know what transfer prices refer to. So let us define this term immediately.

Transfer prices are the prices at which goods and services are sold between related parties, as well as the granting of mutual loans and credit. Given that these are transactions between related parties, there is a possibility of manipulation with the aim of avoiding the payment of taxes.

Transfer prices are also often referred to as controlled transactions, due to the possibility that related parties can agree on adjustments and the aforementioned manipulations.

Any company that does business with related legal entities is obliged to calculate its transfer prices.

By law, related legal entities are defined as entities connected through:

• Capital – ownership, with a holding of over 25%;
• Management function – A legal entity in which the same physical or legal person participates in management and control or in the capital – management functions (director, chairman of the board).
• Family connection – When one physical or legal person is the founder or co-founder of several companies that work with each other. This means when the owners or responsible persons do business with ‘family’.
• The fourth aspect of connectedness and the subject of business analysis is business relationships with entrepreneurs or an entrepreneur who is based in a territory of a special jurisdiction, or what is commonly known as a ‘tax haven’.

All countries in the world protect their budgets and ensure that there is no uncontrolled capital outflow. Croatia is no exception. It is not uncommon for multinational companies to establish subsidiaries or branches in countries where the tax rate is lower than in their home country, thereby transferring profits from one country to another in order to pay less tax.

The verification of transactions, to determine whether related parties operated on “controlled transfer prices” or on market prices, aims to verify the correctness of the tax calculated and paid.

Furthermore, companies are increasingly taking on the role of banks, lending money to one another, particularly when they are associated companies. The person conducting the transfer pricing study is tasked with checking whether the borrowing company is being ‘pipped’ by the high interest rate, or whether the rates are at market levels.

Companies that lend to their related parties without charging interest are also under scrutiny; in such cases, the authorities can conclude, “if you do not value your own capital, you are giving it to others without interest”. However, the state is unwilling to forgo the revenue from tax on the unpaid interest. For this reason, the lender of an interest-free loan is obliged to declare what the interest would have been if it had been charged and to pay tax on that amount.

• Turnover of goods and services
• Turnover of fixed assets (equipment, business premises, land), and intangible assets (trademarks, intellectual property, licences, trade marks…)
• Financing – mutual loans, regardless of whether they are given with or without interest;
• Who is obliged to prepare a transfer pricing report? The obligation to prepare a transfer pricing report rests with businesses that trade with associated persons, or with companies that have their registered office in a special jurisdiction or in ‘tax havens’.

One of the significant characteristics of transfer prices is that they are generally independent of the influence of market factors, because when related parties enter into transactions with each other, all rules regarding transactions and final prices are defined within the affiliated legal entities and thus directly affect the seller’s income and the buyer’s expenses, which leads to the control of the tax bases of both entities.

At the Vizija Računovodstvo accounting firm, you can obtain transfer pricing calculation services on very favourable terms, whilst adhering to the highest European quality standards.