Does a transfer pricing adjustment mean cash has to move between companies?
Not always, and that is the whole point of the term. The primary adjustment changes how much profit a country taxes. It moves no money, so the two companies are left with a balance between them that does not match the profit each has now been taxed on. A secondary adjustment is the tax system's answer to that gap: the amount that never moved is characterised as something, commonly a loan or a distribution, and taxed accordingly. Returning the amount to the company whose profit was increased is usually what removes the need for the characterisation, which is why it should be settled at the same time as the pricing.
What is a deemed dividend after a transfer pricing adjustment?
It is the characterisation applied when a subsidiary is treated as having handed value to its parent and the amount is not returned. Once the excess is treated as a distribution rather than as a debt, withholding follows on it, and the group pays tax on a distribution it never made. The uncomfortable part is the other side. The parent's country never saw a dividend, so it generally has nothing to give credit against. That exposure therefore sits outside the relief that solves the double taxation on the primary adjustment, and has to be dealt with on its own.
Can we avoid the secondary adjustment by returning the money to the parent?
Often, but the route and the timing both matter, and they are set by the country making the adjustment rather than by the group. What is generally required is that the amount actually returns to the company whose profit was increased, in a form the authority recognises, and that the movement is documented against the adjustment it relates to. A netting entry against an existing balance may or may not qualify. We establish the accepted route before a settlement is signed, because agreeing the pricing first and asking about repatriation afterwards is how groups end up with a characterisation they did not need.
Why is interest being charged on a loan that never existed?
Because the characterisation is a loan. If the amount left in the subsidiary is treated as having been advanced to the related party, the arrangement carries the consequences of a loan for tax purposes, interest among them, running from the period the adjustment relates to rather than from the date of assessment. That is what makes older years expensive. The primary adjustment is fixed in size, while the deemed financing accumulates across every year since. It is also why the earliest open year is usually the one to resolve first, since the later ones follow from it.
Will the other country give us credit for the withholding?
Treat it as unlikely until someone has checked, and check early. A credit generally requires the other country to recognise both the income and the tax as its own. Where the amount is a characterisation rather than a payment, the other system may see no income of that character at all, and so nothing to relieve. Where a treaty is engaged, the question becomes which character of payment the relief applies to, and the answer can differ from the character the adjusting country has used. This is the point at which the two returns have to be made deliberately consistent.
Should we settle the primary adjustment before the secondary one?
Handle them together, because the secondary consequence follows from the form the settlement takes. A settlement that fixes a figure and says nothing about how the amount is to be dealt with between the companies leaves the characterisation open, and the group discovers it when an assessment arrives for withholding or deemed interest. Before signing, we set out three things in writing: the amount, the route by which it returns to the company it belongs to, and the entries both companies will make. That document is usually shorter than the pricing analysis and saves more.
How do you avoid double taxation?
You claim relief once, in the right country, in the right order. Usually the source country taxes first, the residence country then gives a credit for that tax against its own charge on the same income, and a treaty caps the source-country rate. Getting the order wrong is what produces a double charge you then have to unwind. The mechanism differs by income type, which is why we map the whole position before filing either return. See how to avoid double taxation.
What is a permanent establishment, and how easily do we create one?
A taxable presence in another country under the treaty — typically a fixed place of business such as an office, branch, factory or workshop, or a dependent agent habitually concluding contracts on your behalf. Some treaties add a services test measured in days. Purely preparatory or auxiliary activity is excluded, but that carve-out is narrower than it sounds: one senior employee working from home in the other country, with authority, has been enough. See business profits and permanent establishment.
