If you are an international company with subsidiaries in multiple countries, I am sure you are haunted by the term “transfer pricing”. I hope that anyone with common costs that are recharging these costs (like admin, CFO, legal, etc.) are already aware of this concept!
I am not a transfer pricing expert, that tends more towards tax advisory, but I had a client call recently focused on this topic and how to optimize his calculations and records to ensure compliance. I thought I would pass along some thoughts on this topic, in case it helps anyone else
👉 TAKE INVENTORY OF YOUR JURISDICTIONS: each country has it’s own requirements related to intercompany recharges. Many countries follow the OECD guidance here, but the US especially being subject to IRS regulations can be more onerous.
👉 DETERMINE WHICH COSTS BENEFIT OTHER ENTITIES and be prepared to defend it. You can only recharge costs that are actually serving the entities charged
👉 EVALUATE IF COSTS ARE LOW OR HIGH VALUE: are the costs recharged supportive in nature or providing some economically significant/valuable activities? This will determine if you need to perform a full transfer pricing exercise to determine arms length.
👉 BACK-UP YOUR MARK UP: Per OECD guidance, low value services can use a blanket 5% markup (avoiding the cost associated with a full exercise). If your costs don’t fall into this category, or you are using a different %, overarm yourself with documentation to support this
👉 DOCUMENT, DOCUMENT, DOCUMENT: in the case of a tax audit, be prepared to show how you calculated the total costs to be recharged and by what allocation keys you recharged those costs (ie turnover, headcount, etc.)
💡 HELP YOUR WORKING CAPITAL: the more frequently you can invoice your intercompany costs, the better your liquidity of the cost center will be. This will normally necessitate use of budgeted/forecasted numbers, as opposed to invoicing based on actuals (as this slows down the process as well). Make sure you do an annual true-up to compare actual FY costs versus those invoiced-to-date!
Anything else I am missing from consideration? I hope this helps!
Navigating US GAAP Conversion as a European finance team
An excerpt from my CFO 4.0 podcast interview
As an experienced cross-border accounting advisor, I’ve dedicated significant parts of my career to helping companies bridge the gap between European and U.S. accounting standards.
Particularly, mastering U.S. Generally Accepted Accounting Principles (US GAAP) poses a substantial challenge for UK and European businesses aiming to expand their investor footprint into the U.S. market.
My recent discussion on the CFO 4.0 Podcast shed light on the nuances and critical strategies required to make this transition as smooth as possible.
Here’s the top takeaways:Â
1. Pre-Audit Preparation is Crucial
Transitioning to US GAAP is an intricate process that demands meticulous preparation. Before even considering an audit, it’s crucial to have a well-documented finance function.
This includes thoroughly analyzing your chart of accounts, policies, and transactions under current GAAP.
From there, my recommended approach involves a three-phased method: starting with discovery, followed by a qualitative differences analysis, and finally, crafting a matrix of existing policies alongside suggested US GAAP policies.
2. Understand Strategic Audit Differences between Countries
The audit process under US GAAP is more rigorous compared to that in the Europe, focusing significantly on accuracy and a detailed audit trail.
My experience has shown that European companies often need to recalibrate their expectations and practices to meet these stringent requirements, which encompass not just financial scrutiny (i.e. a lower audit materiality) but also a broad evaluation of corporate governance and internal controls.
3. Thoughtfully Structure your Conversion Approach
I align my strategic advice for GAAP conversion along a well-structured three-phase approach. It begins with a qualitative and quantitative assessment of financial statements, transitioning into the actual preparation of these statements under US GAAP. Depending on the complexity and the readiness of your company, this transition can take between two to six months. Throughout this period, patience and openness to adapt to stringent U.S. standards are essential.
4. Gain an Understanding of US Regulations
Entering the U.S. market, especially in heavily regulated industries like fintech, necessitates a deep understanding of the U.S. regulatory environment.
For example, a UK-based fintech entity establishing a subsidiary in the States would require comprehensive US GAAP conversion from day one, not only for legal compliance but for operational and strategic alignment with U.S.-based stakeholders.
5. Ensure Documentation Supports Knowledge Transfer
Effective documentation practices not only ensure compliance but enhance operational efficiency and transparency. Recognizing a prevalent gap in knowledge sharing and ongoing support for European entities, I have developed a comprehensive guide available on my website, designed to aid companies in understanding and preparing for US GAAP requirements (you can find the link to access this guide below).
Listen to the full podcast here to gain insights in adopting a proactive, well-informed strategy when tackling US GAAP conversions.
Preparation, strategic phased implementation, and continuous education and support create a solid groundwork for international companies aspiring to thrive in the U.S. market.Â
For those interested, my Notion guide can be accessed below.
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