In taxation and accounting, transfer pricing refers to rules and methods for price transactions within and between companies under common ownership or control. Due to the potential for cross-border transactions being controlled to distort taxable income, tax authorities in many countries can adjust the price of intra-group transfers that are different from those alleged by companies that are not related to the arm's length. The OECD and World Bank recommend intragroup pricing rules based on the arm's length principle, and 19 out of 20 G20 members have adopted similar measures through bilateral agreements and domestic legislation, regulations or administrative practices. Countries with transfer pricing laws generally follow the OECD Pricing Guidelines for Multinational Enterprises and Tax Administration in many ways, although their rules may differ on some important details.
If adopted, the transfer rules allow tax authorities to adjust prices for most cross-border intra-group transactions, including transfer of tangible or intangible property, services, and loans. For example, the tax authority may increase the taxable income of an enterprise by reducing the price of goods purchased from an affiliated foreign manufacturer or raising the royalties the company must charge its foreign subsidiaries for the right to use proprietary technology or brand names. This adjustment is generally calculated using one or more transfer pricing methods specified in the OECD guidelines and subject to judicial review or other dispute resolution mechanisms.
Although transfer pricing is sometimes inaccurately presented by commentators as a tax evasion or practice, this term refers to a set of substantive and administrative regulatory requirements imposed by the government on certain taxpayers. However, aggressive intragroup pricing - especially for debt and intangibles - has played a major role in corporate tax evasion, and that is one of the problems identified when the OECD releases an erosion and earnings shift action plan (BEPS) in 2013. OECD BEPS Report end of 2015 calls for country-by-country reporting and strict rules for risk and intangible transfers, but recommends ongoing compliance with the arm's length principle. This recommendation has been criticized by many taxpayers and professional service firms for abandoning established principles and by some academics and advocacy groups for failing to make adequate changes.
Transfer pricing should not be combined with misleading fake trade miso, which is a technique to hide illegal transfers by reporting fake prices on invoices sent to customs officers. "Because they often involve price errors, many aggressive tax avoidance schemes by multinationals can be easily confused with misinvoicing trades, but they should be perceived as separate policy issues with separate solutions," according to Global Financial Integrity, a nonprofit research. and advocacy groups focused on countering illicit financial flows.
Video Transfer pricing
Generally
Over sixty governments have adopted transfer pricing rules, which in almost all cases (with the notable exception of Brazil and Kazakhstan) is based on the principle of long-handedness. The rule of virtually any country allows parties to set prices at all costs, but permits the tax authorities to adjust the price (for the purposes of calculating the tax liability) in which the price charged is beyond arm's reach. Most, if not all, governments allow adjustments by tax authorities even when there is no intention to avoid or avoid taxes. General rules require that market levels, functions, risks and conditions of sale of unauthorized parties' transactions or activities be proportionate to those items in relation to the transaction or profitability of the parties to the test.
Price adjustments are generally made by adjusting taxable income of all parties involved in the jurisdiction, as well as adjusting any tax or other withholding tax imposed on parties outside jurisdiction. Such adjustments are generally made after filing a tax return. For example, if Bigco AS charges a German Bigco for a machine, either the US or German tax authorities can adjust the price after the relevant tax return check. After the adjustment, the taxpayer is generally allowed (at least by the government adjust) to make a payment to reflect the adjusted price.
Most systems allow the use of some transfer pricing method, where the method is appropriate and supported by reliable data, to test the price of related parties. Among the commonly used methods are uncontrolled, cost-plus, resale or markup pricing, and profitability-based methods. Many systems distinguish methods of testing goods from ones for service or use of the property due to the inherent differences in business aspects such as wide transaction types. Some systems provide mechanisms for sharing or cost allocation for acquiring assets (including intangible assets) among related parties in ways designed to reduce tax controversy. Most governments have authorized their tax authorities to adjust the price charged between the parties concerned. Many such authorizations, including those from the United States, Britain, Canada and Germany, allow for domestic and international adjustments. Some authorizations only apply internationally.
In addition, most systems recognize that long arm prices may not be a particular price point but a price range. Some systems provide steps to evaluate whether prices within that range are considered as arm lengths, such as the interquartile range used in US regulations. Significant deviations between points in the range may indicate a lack of data reliability. Reliability is generally considered to be enhanced by using several years of data.
Most rules require that tax authorities consider actual transactions between parties, and permission adjustments are only for the actual transaction. Some transactions may be collected or tested separately, and testing may use some year data. In addition, transactions whose economic substance differs materially from its form can be characterized under the laws of many systems to follow economic substance.
Transfer price adjustment has been a feature of many tax systems since the 1930s. The United States led the development of a comprehensive and comprehensive pricing transfer guide with the 1988 White Paper and 1990-1992 proposal, finally becoming a regulation in 1994. In 1995, the OECD issued an expanded pricing transfer guideline in 1996 and 2010. These two sets of guides are very similar and contain certain principles followed by many countries. The OECD guidelines have been formally adopted by many EU countries with little or no modification.
Maps Transfer pricing
Comparability
Most rules provide a standard when prices, transactions, profitability, or other unrelated items are deemed comparable enough in testing of related party items. Such standards usually require that the data used in the comparison be reliable and that the means used to compare produce reliable results. The US and OECD rules require that reliable adjustments should be made to all differences (if any) between related party items and comparisons claimed which may affect the condition being examined materially. If such reliable adjustments can not be made, the reliability of the comparison is questionable. Price comparisons tested at uncontrolled prices are generally considered to be enhanced by using some data. Transactions that are not made in normal business are generally not considered to be comparable to those taken in ordinary business activities. Among the factors to be considered in determining comparability are:
- property or service properties provided between the parties,
- functional analysis of transactions and parties,
- comparison of contract terms (either written, spoken, or implied by the conduct of the parties), and
- Comparison of significant economic conditions that could affect prices, including the impact of different market levels and geographic markets.
Nature of property or service
Comparability is best achieved when identical items are compared. However, in some cases it may be possible to make reliable adjustments for differences in certain items, such as differences in features or quality. For example, the gold price may be adjusted based on actual gold weight (an ounce of 10 carat gold would be half the price of an ounce of 20 carat gold).
Functions and risks
Buyers and sellers can perform different functions related to exchange and take on different risks. For example, the machine seller may or may not provide warranty. The price that the buyer will pay will be affected by this difference. Among the functions and risks that may affect the price are:
- Product development
- Manufacturing and assembly
- Marketing and advertising
- Transportation and warehousing
- Credit risk
- Product obsolescence risk
- Market and entrepreneurial risk
- Collect risk
- Financial and currency risk
- Company or industry specialty items
Terms of sale
The ways and conditions of sale can have a material impact on prices. For example, buyers will pay more if they can delay payments and purchase in smaller amounts. Terms that may affect pricing include payment time, warranty, volume discount, duration of rights to use the product, considerations, etc.
Market levels, economic conditions and geography
Goods, services or property can be provided to different levels of buyers or users: producers to wholesalers, wholesalers to wholesalers, wholesalers to retailers, or to final consumption. Market conditions, and thus prices, vary greatly on this level. In addition, prices can vary greatly between different economies or geographies. For example, the head of a cauliflower in the retail market would have ordered a much more different price in rural India than electricity in Tokyo. Buyers or sellers may have a different market share that allows them to reach volume discounts or put pressure on others to lower prices. If prices are to be compared, the alleged comparison must be at the same market level, within the same or similar economic and geographic environment, and under the same or similar conditions.
Test the price
Tax authorities generally check the actual price charged between the parties to determine whether the adjustment is appropriate. The examination is by comparing (testing) those prices with comparable prices imposed between unrelated parties. Such tests may only be conducted on tax returns by tax authorities, or taxpayers may be required to perform the tests themselves before applying for tax returns. This kind of testing requires determining how testing should be done, called the transfer pricing method.
Best method rule
Some systems give preference to specific methods to test prices. The OECD and US systems, however, determined that the method used to test the feasibility of related party pricing should be the method that yields the most reliable arm sizes. This is often known as the "best method" rule. Factors to consider include the comparability of tested and independent goods, the reliability of available data and assumptions under the method, and the validation of method results by other methods.
Unchecked price method (CUP)
Comparable pricing method (CUP) is a transactional method that determines a reasonable price using the price charged in a comparable transaction between unrelated parties. In principle, the OECD and most countries that follow OECD guidelines consider the CUP method as the most direct method, provided that any discrepancy between controlled and uncontrolled transactions does not have a material effect on the price or its effect can be estimated and adjustment of the price accordingly. can make. Adjustments may be appropriate if controlled and uncontrolled transactions differ only in volume or condition; for example, interest adjustments can be applied where the only difference is the timing of payments (e.g., 30 days vs. 60 days). For undifferentiated products such as commodities, price data for long transactions ("external comparison") between two or more other unrelated parties may be available. For other transactions, it is possible to use comparable transactions ("internal comparison") between the controlled party and the unrelated party.
The criteria for applying the CUP method reliably are often impossible to fulfill for licenses and other transactions involving unique intangible property, requiring the use of a valuation method based on projected earnings.
Other transactional methods
Among other methods that rely on actual transactions (generally between one party tested and a third party) and not an index, aggregate, or market survey are:
- Cost-plus Method (C): goods or services provided to unrelated parties are consistently rewarded with actual costs plus fixed markup. Testing is by comparing the percentage of markup.
- Resale price method (RPM): goods are regularly offered by the seller or purchased by the retailer to/from unrelated parties at a standard "list" price minus fixed discounts. Testing is by comparing discount percentages.
- The gross margin method: similar to the resale price method, is known on some systems.
Profit-Based Method
Some pricing methods do not rely on actual transactions. Use of this method may be necessary due to the lack of reliable data for transactional methods. In some cases, non-transactional methods may be more reliable than transactional methods because market and economic adjustments for transactions may not be reliable. These methods may include:
- The method of comparative profit (CPM): the rate of return of firms located in the same place in similar industries can be compared with those tested. See US rules below.
- Transactional margin method (TNMM): when called transactional methods, testing is based on the profitability of a similar business. Check out the OECD guidelines below.
- Profit-sharing method: the company's total earnings are divided formularies based on econometric analysis.
CPM and TNMM have practical advantages in ease of implementation. Both methods rely on microeconomic data analysis rather than special transactions. These methods are discussed further with respect to the US and OECD systems.
Two methods are often given for profit sharing: equal proportionate profits and the distribution of residual profits. The former requires that the profit sharing be derived from the combined operating income of the uncontrolled taxpayers whose transactions and activities are proportional to the transactions and activities tested. The method of distributing residual profits requires a two-step process: the first profit is allocated for routine operations, then the remaining profit is allocated based on the non-routine contributions of the parties. Residual allocation may be based on external market benchmarks or estimates based on capitalized costs.
Stated party indicators and profitability levels
Where price testing occurs other than purely transactional basis, such as CPM or TNMM, it may be necessary to determine which of the two related parties to be tested. Testing should be performed on the test of the party which will produce the most reliable results. In general, this means that the party being tested is the easiest of all the functions and risks. Comparing the results tested to comparable parties may require adjustments to the results of the parties tested or comparisons for items such as inventory levels or accounts receivable.
Testing requires determining what indication of profitability should be used. This may be a net profit on transactions, return of assets used, or other measures. Reliability is generally upgraded to TNMM and CPM by using multiple results and data for several years. this is based on the state of the country concerned.
Intangible property issues
A valuable intangible property tends to be unique. Often there are no comparable goods. Values ​​added with tangible use may be represented in the price of goods or services, or by payment of fees (royalties) for the use of intangible property. Intangible licenses cause difficulties in identifying comparable items for testing. However, if the same property is licensed to an independent party, the license may provide a comparable transactional price. Custom profit-sharing methods try to extract tangible values ​​into account.
Services
Companies may involve related or unrelated parties to provide the services they need. If the required services are available in a multinational group, there may be significant gains for the company as a whole for the group component to perform the service. There are two issues with respect to allegations between the parties concerned for the service: whether the service is actually done that guarantees the payment, and the price charged for the service. Tax authorities in most countries have, either formally or in practice, incorporated these questions into the examination of related party service transactions.
There may be tax advantages gained for the group if one member charges a fee to another member for the service, even though the member who bears the costs does not benefit. To counter this, most system rules allow tax authorities to challenge whether the allegedly committed service really benefits the billed member. Investigations may focus on whether the service is indeed being carried out as well as benefiting from the service. For this purpose, some rules distinguish stewardship services from other services. General stewardship services are the property that the investor will incur for his own benefit in managing his investments. The fees for the investee for such services are generally inappropriate. If the service is not done or where the related party that bears the expenses does not get direct benefits, the tax authorities may prohibit the cost altogether.
If the service is performed and provides benefits to related parties that bear the cost for the service, the tax regulation also allows adjustments to the price charged. The rules for testing the price of a service may be somewhat different from the rules for testing the prices charged for the goods due to the inherent difference between the provision of services and the sale of goods. The OECD Guidelines provide that provisions relating to goods should be applied with little modification and additional consideration. In the US, different price testing methods are provided for the service. In both cases, standards of comparability and other things apply to goods and services.
It is common for companies to do services for themselves (or for their components) that support their core business. Examples include accounting, legal, and computer services for companies not involved in the business of providing such services. The transfer pricing rules recognize that it may not be appropriate for a company component that performs such services for other components to profit on those services. The pricing test charged in such cases may be referred to a service fee or service fee method. The application of this method may be limited under the regulations of certain countries, and is required in some countries for example. Canada.
If the service performed is natural by the company (or the component performing or accepting) as a key aspect of its business, the OECD and US rules specify that some level of profit corresponds to the component performing the service. Canadian rules do not allow such profits. Price testing in such cases generally follows one of the methods described above for the goods. The cost-plus method, in particular, can be favored by tax authorities and taxpayers because of the ease of administration.
Multi-component companies can find significant business benefits to share development costs or acquire specific assets, especially intangible assets. Detailed US rules specify that group members can enter into a cost sharing agreement (CSA) with respect to the costs and benefits of developing an intangible asset. The OECD Guidelines provide more general advice to tax authorities for enforcement related to cost contribution agreements (CCAs) in relation to the acquisition of different types of assets. Both sets of rules generally specify that costs should be allocated among members based on the anticipated benefits of each. Fees between members must then be made so that each member only covers part of the allocated fee. Since the allocations must be inherently made based on the expectations of future events, the allocation mechanism must provide a prospective adjustment in which previous projections of events have been proven wrong. However, both sets of rules generally prohibit reapply in making allocations.
The main requirement to limit the adjustment related to the cost of developing an intangible asset is that there must be a written agreement among the members. The tax code may enforce additional contract, documentation, accounting and reporting requirements for CSA or CCA participants, which differ by country.
Generally, under CSA or CCA, each participating member shall be entitled to use some portion rights developed under the agreement without further payment. Accordingly, CCA participants are entitled to use the process developed under the CCA without royalty payments. Ownership rights need not be transferred to participants. The division of rights is generally based on some observable size, such as by geography.
Participants in CSA and CCA can donate pre-existing assets or rights to be used in asset development. Such contributions may be referred to as platform contributions. Such contributions are generally considered to be payments by contributing members, and are themselves subject to the rules of transfer pricing or special CSA rules.
The main consideration in CSA or CCA is what development cost or acquisition cost must be subject to agreement. This can be determined by agreement, but also subject to adjustments by tax authorities.
In determining the anticipated benefits, participants are forced to make projected future events. Such projection is basically uncertain. Furthermore, there may be uncertainty about how such benefits should be measured. One way of determining such anticipated benefits is to project the participants' gross sales or margins, measured in shared currency, or in-unit sales.
Both sets of rules recognize that participants can enter or leave CSA or CCA. After such an event, the rules require members to make buy or buy payments. Such payments may be required to represent the market value of existing development circumstances, or can be calculated on the basis of a cost recovery or market capitalization model.
Punishment and documentation
Some jurisdictions impose a significant penalty associated with the transfer price adjustment by the tax authorities. This penalty may have a threshold for imposition of penalty penalties, and penalties may be increased on the other threshold. For example, US rules apply a 20% penalty if the adjustment exceeds USD 5 million, rising to 40% of additional taxes whose adjustments exceed USD 20 million.
The rules of many countries require taxpayers to document that the price charged is within the price permitted under the transfer pricing rules. If such documentation is not timely prepared, penalties may be imposed, as above. Documentation may be required to be placed before filing a tax return to avoid this penalty. Documentation by the taxpayer need not be relied on by any tax authority in any jurisdiction that allows for price adjustment. Some systems allow tax authorities to ignore the non-timely information provided by taxpayers, including the advanced documentation. India requires that documentation not only be in place before filing a return, but also that the documentation is certified by a chartered accountant who prepares the return of the company.
AS. certain tax rules
US long transfer pricing rules. They combine all the above principles, using CPM (see below) instead of TNMM. US rules specifically state that taxpayer intent to avoid or avoid tax is not a prerequisite for adjustment by the Internal Revenue Service, nor is it a non-recognition provision. The US rules do not give priority to certain pricing methods, which require explicit analysis to determine the best method. The US comparative standard limits the use of adjustments for business strategy in testing pricing for a clearly defined market share strategy, but allows for limited consideration of site savings.
Comparable profit method
The Comparable Profits method (CPM) was introduced in the proposed regulations of 1992 and has been a prominent feature of IRS transfer pricing practices ever since. Based on CPM, the overall results of the parties tested, rather than the transactions, are compared with the overall results of the companies located in the same place for reliable data available. Comparisons are made for the most reliable profit level indicator representing profitability for this type of business. For example, the profitability of a sales firm may be most measurable as a return on sales (profit before tax as a percentage of sales).
CPM inherently requires a lower level of comparability in the nature of goods or services. Further, data used for CPMs is generally obtainable easily in the US and many countries through comparable general company submissions.
Results from tested or comparable companies may require adjustments to achieve comparability. Such adjustments may include effective interest adjustments for customer financing or debt levels, inventory adjustments, etc.
Plus costs and resale price issues
The US rules apply the resale price method and the plus cost to goods that are actually transaction-based. Thus, a comparable transaction must be found for all transactions tested to apply this method. Industrial averages or statistical measures are not allowed. Where a manufacturing entity provides manufacturing contracts for related and unrelated parties, it may be ready to have reliable data on comparable transactions. However, there is no comparison as at home, it is often difficult to obtain reliable data to implement cost-plus.
The rules on the service expand cost-plus, providing additional options to reduce this data problem. Allegations to related parties for services that are not in the main business of either the party tested or the related party group are suspected to be considered an extension if the price is at a zero plus cost (service cost method). Such services may include rear-space operations (eg, data processing and accounting services for groups not involved in providing such services to clients), product testing, or non-integral services. This method is not permitted for the manufacture, resale, and certain other services that are usually an integral part of the business.
US rules also specifically permit shared service agreements. Under the agreement, different members of the group may perform services that benefit more than one member. The price charged is considered the length of the arm in which the cost is allocated consistently among the members on a reasonably anticipated benefit. For example, shared service costs may be allocated among members based on formulas that involve expected or actual sales or factor combinations.
Inter-party terms
Under U.S. rules, the actual behavior of the parties is more important than the terms of the contract. Where the conduct of the parties is different from the terms of the contract, the IRS has the authority to assume the actual term becomes necessary to enable actual behavior.
Adjustments
US rules require that the IRS can not adjust prices found within arm's reach. If the price is charged outside the range, the price may be adjusted by the IRS unilaterally to the midpoint of the range. The burden of proof that the IRS transfer pricing adjustment is incorrect is the taxpayer unless the IRS adjustment is proven arbitrary and variable. However, the courts in general require both taxpayers and the IRS to point out their facts in which a deal is not reached.
Documentation and punishment
If the IRS adjusts the price by more than $ 5 million or 10 percent of the gross receipt of the taxpayer, a penalty applies. The penalty is 20% of the amount of tax adjustment, rising to 40% at higher limit.
This penalty can be avoided only if the taxpayer maintains the requirements of the documentation meetings in the rules, and provides such documentation to the IRS within 30 days after the IRS request. If documentation is not provided at all, the IRS may make adjustments based on whatever information is available. Secure means documentation exists with 30 days of taxpayer tax filing. The documentation requirements are quite specific, and generally require the analysis of the best methods and detailed support for pricing and the methodologies used to test those prices. To qualify, the documentation should be sufficiently supportive of the price used in calculating the tax.
Agree with revenue standards
The U.S. tax law requires that foreigners/users of intangible property (patents, proceedings, trademarks, knowledge, etc.) be deemed to pay to the transfer of royalty controllers/developers commensurate with the income derived from the use of intangible property. This applies whether the royalties are actually paid or not. This requirement may result in a withholding tax on payments deemed made for the use of intangible properties in the U.S.
OECD custom tax rule
OECD guidelines are voluntary to member countries. Some countries have adopted almost unchanging guidelines. Terminology may vary between countries that adopt, and may vary from those used above.
OECD guidelines prioritize transactional methods, described as "the most direct way" to establish comparability. The Transactional Net Margin Method and the Profit Shared method are used either as the last preferred method or where traditional transactional methods can not be applied reliably. CUP is not given priority among transactional methods in OECD guidelines. The guide states, "It may be difficult to find transactions between independent companies that are quite similar to controlled transactions so there is no difference that has a material impact on prices." Thus, adjustments are often required either for the price being tested or the uncontrolled process.
Comparability standard
OECD rules allow consideration of business strategies in determining whether the results or transactions are comparable. These strategies include market penetration, market share expansion, cost savings or location, etc.
Transactional net margin method
Transactional margin net method (TNMM) compares the net profitability of a transaction, or group or aggregation of transactions, to other transactions, groups or aggregations. Under TNMM, the use of actual and verifiable transactions is given strong preference. However, in practice, TNMM makes it possible to make calculations for aggregate at the firm level of transactions. Thus, TNMM may in some circumstances function as US BPS.
Requirements
Contractual terms and contracts between parties shall be respected under OECD rules unless the substance of the transaction differs materially from those terms and adheres to such provisions shall impede the tax administration.
Adjustments
OECD rules generally do not allow the tax authorities to make adjustments if the price charged between related parties is within arm's reach. If the price is outside the range, the price can be adjusted to the most appropriate point. The proof of conformity adjustment is generally on the tax authorities.
Documentation
The OECD Guidelines do not provide specific rules on the nature of taxpayer documentation. These are submitted to each member country.
EU
In 2002, the EU created the EU Joint Pricing Pricing Forum. Communications on "Taxes and Development - Working with Developing Countries in Promoting Good Governance in Taxes", COM (2010) 163 final, highlighting the need to support the capacity of developing countries in mobilizing domestic resources for development in accordance with principles - a good principle of government in taxation. In this context, PwC prepares reports of Transfer pricing and developing countries .
Many EU countries currently implement the OECD Guidelines for Transfer Rates. The latest adopter is Cyprus who issued its verdict in 2017 for financial arrangements.
China's custom tax rule
Prior to 2009, China generally followed the OECD Guidelines. The new guidelines were announced by the State Tax Administration (SAT) in March 2008 and issued in January 2009. These guidelines differ materially in approaches from those in other countries in two main ways: 1) they are guidelines issued to instruct the field office how to undertake transfer pricing and adjustments, and 2) the factors to be examined are different from the transfer pricing method. The guides include:
- Administration
- Obligatory Taxpayer documentation and documentation
- The principle of transfer pricing, including comparability
- Guidelines on how to check
- Administrative pricing settings and advanced cost sharing
- Exam controlled foreign company
- thin capitalization
- General avoidance
On September 17, 2015, SAT released a revised draft version of "Implementation Measures for Custom Tax Adjustment (Circular 2)", which replaced previous 2009 guidelines. Three new sections are introduced under the revised draft: monitoring and management, intangible transactions/intra-group services and a new approach to transfer pricing documentation.
Documentation
Under Circular 2009, the taxpayer must disclose a related party transaction when filing a tax return. In addition, the circular provides a set of three-tier documentation and reporting standards, based on the total number of inter-company transactions. Taxpayers affected by the rules involved in inter-company transactions under RMB 20 million for the year are generally exempt from reporting, documentation, and punishment. Those with transactions exceeding RMB 200 million are generally required to complete a study on transfer pricing before applying for tax returns. For taxpayers at the top level, the documentation should include a comparative analysis and justification for the selected transfer pricing method.
The 2015 design introduces a revamped three-tiered standard approach for transferring pricing documentation. The levels vary in the documentation content and include parent files, local files, and country-by-country reports. This draft also requires companies involved with related party service transactions, cost sharing agreements or thin capitalization to deliver so-called "Custom Files."
General principles
China's transfer pricing rules apply to transactions between Chinese businesses and domestic and foreign stakeholders. Related parties include companies that meet one of eight different tests, including the same 25% shareholding, overlapping councils or management, significant debt holdings, and other tests. Transactions that are subject to the guidelines cover most business transactions may have one another.
The Circular instructs field testers to review the comparability and analysis of taxpayer methods. Comparative analyzing methods and what factors should be considered differ slightly based on the type of transfer pricing analysis method. Guidelines for CUP include specific functions and risks to be analyzed for each type of transaction (goods, leasing, licensing, financing, and services). Guidelines for resale price, cost-plus, transactional margin net method, and profit sharing are short and very general.
Cost sharing
Chinese rules provide a common framework for cost-sharing agreements. This includes the basic structure of the agreement, provisions for incoming and outgoing payments based on a reasonable amount, a minimum operating period of 20 years, and a mandatory SAT notice within 30 days of the closing of the agreement.
Agreement between taxpayers and government and dispute settlement
Tax authorities of most major powers have signed unilateral or multilateral agreements between taxpayers and other governments on regulating or testing the pricing of related parties. This agreement is referred to as a advance pricing agreement or pricing arrangements (APAs). Under APA, taxpayers and one or more governments agree on the methodology used to test prices. APA is generally based on transfer pricing documentation prepared by the taxpayer and presented to the government (s). Multilateral agreements require intergovernmental negotiations, conducted through a designated competent authority group . The agreement is generally for several periods of the year, and may be retroactive. Most such agreements are not subject to public disclosure rules. Rules that control how and when taxpayers or tax authorities may initiate the APA process differ by jurisdiction.
Economic theory
The discussion in this section explains the economic theory behind optimal transfer rates with optimal defined as transfer pricing that maximizes overall corporate profits in a non-realistic world without taxes, without risk capital , there is no development risk, no externalities or other frictions exist in the real world. In practice many factors affect the transfer rates used by multinational corporations, including performance measurement, accounting system capabilities, import quotas, import duties, VAT, income taxes, and (in most cases) a lack of price concern.
From the theory of marginal pricing, the optimal level of output is where marginal cost equals marginal revenue. That is, the company must expand its output as long as the marginal revenue from additional sales is greater than its marginal cost. In the next diagram, this intersection is represented by point A, which will result in the price of P *, given the demand at point B.
When a company sells some of its products to itself, and only to itself (ie there is no external market for that particular transfer), the picture becomes more complicated, but the result remains the same. The demand curve remains the same. The optimal price and quantity remain the same. But marginal cost of production can be separated from the total marginal cost of the firm. Similarly, marginal revenue associated with the production division may be separated from marginal revenue for the total firm. This is referred to as the Net Marginal Revenue in Production (NMR) and is calculated as the marginal revenue of the firm minus the cost of the marginal distribution.
It can be shown algebraically that the intersection of the marginal cost curve of the firm and the marginal revenue curve (point A) must occur at the same quantity as the marginal cost curve of the production division with the marginal revenue net of production (point C).
If the production division is able to sell transfers in either a competitive market (or internally), then both must operate where the marginal cost equals its marginal revenue, to maximize profit. Because external markets are competitive, firms are price takers and must accept transfer rates determined by market forces (their marginal revenue from transfers and demand for transfer products to transfer prices). If the market price is relatively high (as in Ptr1 in the next diagram), then the firm will experience an internal surplus (internal supply surplus) equal to the amount of Qt1 minus Qf1. The actual marginal cost curve is determined by points A, C, D.
If the company is able to sell its transfer in an imperfect market, it does not need to be a price taker. There are two markets each with its own price (Pf and Pt in the next diagram). The aggregate market is built from the first two. That is, point C is the horizontal sum of points A and B (as well as for all other points on the Net Marginal Revenue (NMRa) curve). The optimal total quantity (Q) is the sum of Qf plus Qt.
An alternative approach to earnings allocation
The commonly proposed alternative to the transfer pricing rule based on the arm's length principle is the division of the formulary, in which the profits of the company are allocated in accordance with objective metrics of activities such as sales, employees, or fixed assets. Some countries (including Canada and the United States) allocate taxation rights among their political subdivisions in this way, and have been recommended by the European Commission for use in the European Union. According to short amicus curiae, filed by the attorney general of Alaska, Montana, New Hampshire and Oregon to support the state of California in the case of the Supreme Court of the USA Barclays Bank PLC v Tax Council Franchise, > the method of dividing the formulary, also known as the unit-sharing method, has at least three major advantages over a separate accounting system when applied to multi-jurisdictional businesses. First, the unity method captures the wealth and value added resulting from multinational and multinational corporations' economic interdependencies through functional integration, management centralization, and economies of scale. Business units also benefit from more tangible values ​​shared among the constituent parts, such as reputation, goodwill, customers, and other business relationships. View, e.g., Car, 445 US at 438-40; Container, 463 US at 164-65.
Separate accounting, with an emphasis on breaking down overall business revenues from sources within a single country, ignores the attributable value to the integrated nature of the business. However, to a large degree, the wealth, power, and profit of major multinationals of the world are due to the fact that they are integrated, business units. Hellerstein's Treatise, P8.03 at 8-32.n9 As one commentator has pointed out: To believe that multinationals have no advantage over independent firms operating within the same business sphere is to ignore the economic and political forces of the multinational giants. By trying to treat businesses that are in fact unity as independent entities, separate accounting "operates in a pretend universe, as in Alice in Wonderland, it turns reality into luxury and then pretends it is the real world"
Because the state imposes different corporate tax rates, companies that aim to minimize the overall tax to be paid will set the transfer price to allocate more of the world's profits to countries with lower taxes. Many countries seek to impose sanctions on companies if countries consider that they are being revoked on taxable income. However, since the participating countries are sovereign entities, obtaining data and initiating meaningful actions to limit tax evasion is difficult. A publication of the Organization for Economic Cooperation and Development (OECD) states, "Transfer rates are significant for both taxpayers and tax administration because they determine the bulk of revenues and expenditures, and therefore taxable profits, from related companies in different tax jurisdictions. "
Reading and the entire reference list
International :
- Wittendorff, Jens: Transfer Price and Length Arm Principles in International Tax Law, 2010, Kluwer Law International, ISBN 90-411-3270-8.
Canada :
- Section 247 of the Income Tax Act (Canada)
- Circular 87-2R Information - International Transfer Rates (1999)
- Circular Information 94-4R - International Transfer Price: Preliminary Price Setting (APA) (2001)
- TPM 07 - Reference to the Price Transfer Review Committee (2005)
- TPM 09 - Reasonable Efforts under section 247 of the Income Tax Act (2006)
China : The large international accounting and law firm has published a summary of the guidelines. Check out their website.
India :
- Income Tax Compilation of Transfer Pricing Rules
- Overview of Domestic Transfers Prices
OECD :
- Price Transfer Guide for Multinational Enterprises and Tax Administration . OECD Publishing, Paris. Organization for Economic Cooperation & amp; Development. July 2010. doi: 10.1787/tpg-2010-en.
- Country Profile of Transfer Rates, cross references are useful for guidance in each member country
- Basic Erosion and Profit Shift (BEPS), OECD landing page
- Syncing Pricing Transfer Results with Value Creation, Actions 8-10 - Final Report 2015 . OECD Publishing, Paris. OECD/G20 Base Erosion and Profit Shift Project. October 2015. doi: 10.1787/9789264241244-en.
- Price Transfer Documentation and Country Reporting For Country, Action 13 - Final Report 2015 . OECD Publishing, Paris. OECD/G20 Base Erosion and Profit Shift Project. October 2015. doi: 10.1787/978-9264241480-en. Ã,
Russian Federation :
- Russian Federation Tax Code [1]
United Kingdom :
- Transfer pricing law: ICTA88/Sch 28AA
- International Manual Transfer Price HMRC INTM430000
United Nations
- Practical Manual on Transfer Pricing for Developing Countries (2013) (PDF) .
United States :
- Law: 26 USC 482
- Regulations: 26 CFR 1.482-0 to 9
- IRS view of OECD rules: https://www.irs.gov/pub/irs-apa/apa_training_oecd_guidelines.pdf
- WHAT procedure: Pdt. Proc. 2008-31
- Feinschreiber, Robert: Transfer Pricing Methods, 2004, ISBN 978-0-471-57360-9
- Parker, Kenneth and Levey, Marc: Director of Tax Guide for International Transfer Rates, 2008, ISBN 978-1-60231-001-8
- Services by Thompson RIA and Wolters Kluwer: look for "transfer rates" on their website
References
External links
- OECD Transfer Pricing Guidelines for Multinational Enterprises and 2017 Tax Administration
- OECD transfer pricing resources
- Ernst & amp; Young * 2010 Global Pricing Survey
- Ernst & amp; Young * 2009 Global Transfer Pricing Survey
- OECD Transfer Pricing Country Profiles
- New pricing transfer rules in China 2009
- IRS transfer pricing documentation
- Bea vs tax agency in transfer price
- Payment Payment Litigation
- Transfer Pricing System
Source of the article : Wikipedia
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