Business is anything which is done with a motive of profit. It involves trade, commerce, and adventure. Taxes are paid on profits. It is assumed that the level of profit reflects the true value of the business and therefore, ideally the taxes are collected on the current profits.
The tax regulation of a country along with many businesses miss recognizing that the true worth of a company does not lie in the profit and loss account but something so fluid that it cannot be seen or touched. This is called as an intangible or intellectual property. On an average 70%-80% of the value of a business is carried through its intangibles and many of which are not even known to the company that they exist. Examples could be customer relationships, favorable names, self-developed brands, market perception about the products, the location of the store, certain process know-how in the industry over the other peers, management of the company, certain competitive advantage etc. The list could go on and on, yet most of the businesses do not realize that the real value may not lie in the service or the product but the intangibles that the business possesses. More importantly, these intellectual properties never surface on the books of accounts, as self-generated intangibles are never recorded in the books. This leaves a big vacuum between what is taxed and what is supposed to be taxed. Value creation is never taxed, however, consideration/ profits/ gains received against such value created could be taxed as capital gains or business profits. Important to note that there could be tax planning legislation prescribed in the tax laws of a country that could legally and substantively do away with such capital gains or business profits if met with certain conditions.
Transfer Pricing models provide an opportunity to the multinational taxpayer to plan their taxes well in advance and decide where the value could be created. Once the value is created in a particular tax jurisdiction, it becomes difficult to plan taxes around such value. In short its easy to build future but not to recreate the past. This is where most of the tax litigation finds its place.
If you are a startup or an enterprise thinking of going global, it is important for you to focus on creation, development, enhancement, maintenance, and protection of your intellectual property that could not be seen rather than dividing your focus between profits and value in two different directions. You can use transfer pricing as an effective tool to effectively plan taxes and mitigate risks, which could be perfectly legal, moral, ethical and with complete substance.
In case you would like to know more about how your IPs could help you effectively plan taxes globally, you may like to contact me at firstname.lastname@example.org for further details.