Doing cross-border business with a related party, which includes foreign subsidiaries and parent companies, can be complicated. A related party is any entity that can exercise control or significant influence over the operating policies of another entity. In global trade, it's an individual or business that exercises a 10 percent interest in both the exporter and the ultimate consignee.

A related party transaction occurs during the transfer of resources, services, or obligations between related parties -- regardless of whether a price is charged. The term “transfer price” refers to the price at which one company sells goods or services to a related affiliate in its supply chain. While the transfer price may be negligible, the obligations and reporting requirements that go along with the transaction are not.

Countries have adopted various laws and practices to ensure transferred goods and services are appropriately priced based on market conditions. The goal of this legislation is to ensure that revenue generated within a country, and thereby taxable by that country, is not inappropriately transferred to a related party outside that country to avoid taxes. Therefore, in a related party transaction, taxes are assessed on transferred goods or intangibles regardless of whether money changes hands. In any related party transaction, disclosing the relationship, reporting the transactions and conducting business “at arm’s length” are important ways to mitigate audit risks.

Supply chain managers need to balance the goals of tax-effective supply chain management with the organization’s compliance requirements. Solely focusing on reducing taxes may not result in the most efficient supply chain and could potentially result in non-compliance with related party transaction regulations. A collaborative approach that engages all parties -- supply chain managers, senior executives and tax specialists – will ensure successful results.