Transfer pricing
In taxation and accounting, transfer pricing refers to the
rules and methods for pricing transactions between enterprises under common
ownership or control. Because of the potential for cross-border controlled
transactions to distort taxable income, tax authorities in many countries can
adjust intragroup transfer prices that differ from what would have been charged
by unrelated enterprises dealing at arm’s length (the arm’s-length
principle).[1][2] The OECD and World Bank recommend intragroup pricing rules
based on the arm’s-length principle, and 19 of the 20 members of the G20 have
adopted similar measures through bilateral treaties and domestic legislation,
regulations, or administrative practice.[3][4][5] Countries with transfer pricing
legislation generally follow the OECD Transfer Pricing Guidelines forMultinational Enterprises and Tax Administrations in most respects,[5] although
their rules can differ on some important details
Where adopted, transfer pricing rules allow tax authorities
to adjust prices for most cross-border intragroup transactions, including
transfers of tangible or intangible property, services, and loans.[2][7] For
example, a tax authority may increase a company’s taxable income by reducing
the price of goods purchased from an affiliated foreign manufacturer[8] or
raising the royalty the company must charge its foreign subsidiaries for rights
to use a proprietary technology or brand name.[9] These adjustments are
generally calculated using one or more of the transfer pricing methods
specified in the OECD guidelines[10] and are subject to judicial review or
other dispute resolution mechanisms.[11]
Although transfer pricing is sometimes inaccurately
presented by commentators as a tax avoidance practice or technique,[12][13][14][15][16]
the term refers to a set of substantive and administrative regulatory
requirements imposed by governments on certain taxpayers.[17] However,
aggressive intragroup pricing – especially for debt and intangibles – has
played a major role in corporate tax avoidance,[18] and it was one of the
issues identified when the OECD released its base erosion and profit shifting
(BEPS) action plan in 2013.[19] The OECD’s 2015 final BEPS reports called for
country-by-country reporting[20] and stricter rules for transfers of risk and
intangibles but recommended continued adherence to the arm’s-length
principle.[21] These recommendations have been criticized by many taxpayers and
professional service firms for departing from established principles[22] and by
some academics and advocacy groups for failing to make adequate changes.[23]
Transfer pricing should not be conflated with fraudulent
trade mis-invoicing, which is a technique for concealing illicit transfers by
reporting falsified prices on invoices submitted to customs officials.[24]
“Because they often both involve mispricing, many aggressive tax avoidance
schemes by multinational corporations can easily be confused with trade
misinvoicing. However, they should be regarded as separate policy problems with
separate solutions,” according to Global Financial Integrity, a non-profit
research and advocacy group focused on countering illicit financial flows.
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