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Transfer pricing

See also: Transfer mispricing and Base erosion and profit shifting
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Transfer pricing refers to the rules and methods for pricing transactions within and 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 for Multinational Enterprises and Tax Administrations in most respects,[5] although their rules can differ on some important details.[6]

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 (transfer mispricing),[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.[25]

  1. ^ OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010, para. 0.18. Paris: OECD Publishing. 2010. doi:10.1787/tpg-2010-en. ISBN 978-92-64-09018-7.
  2. ^ a b Cooper, Joel; Fox, Randall; Loeprick, Jan; Mohindra, Komal (2016). Transfer Pricing and Developing Economies : A Handbook for Policy Makers and Practitioners. Washington, DC: World Bank. pp. 18–21. ISBN 978-1-4648-0970-5.
  3. ^ World Bank pp. 35-51
  4. ^ OECD Guidelines 0.15
  5. ^ a b "Transfer Pricing Country Profiles - OECD". www.oecd.org. Retrieved 2017-02-27.
  6. ^ "The Year in Review: The Year of the Many Arm's-Length Standards". 85 Tax Notes Int'l 25 (2017-01-02). Tax Analysts. Retrieved 2017-02-27.
  7. ^ OECD Guidelines 0.11
  8. ^ OECD Guidelines 1.47-1.48
  9. ^ OECD Guidelines 6.1-6.39
  10. ^ OECD Guidelines 2.9
  11. ^ OECD Guidelines 0.18, 4.1-4.168
  12. ^ Sikka, Prem (2009-02-12). "Shifting profits across borders". The Guardian. ISSN 0261-3077. Retrieved 2017-02-27.
  13. ^ Taibbi, Matt (2011). "Corporations to Get Tax Holiday? You're Kidding?". Rolling Stone. Retrieved 2017-02-27.
  14. ^ Rice, William; Clemente, Frank (2016). "Gilead Sciences: Price Gouger, Tax Dodger". Washington, DC: Americans for Tax Fairness. p. 12.
  15. ^ "Uncontained". The Economist. 2014-05-03. Retrieved 2017-02-27.
  16. ^ Confessore, Nicholas (2016-11-30). "How to Hide $400 Million". The New York Times. ISSN 0362-4331. Retrieved 2017-02-27.
  17. ^ Falk, Daniel, “Transfer Pricing: Alternative Practical Strategies,” 19 Tax Mgmt. (BNA) Transfer Pricing Report, at 829 (Nov. 18, 2010)
  18. ^ Measuring and Monitoring BEPS, Action 11 - 2015 Final Report. Paris: OECD Publishing. 2015. pp. 151–156. ISBN 978-92-64-24134-3.
  19. ^ Action Plan on Base Erosion and Profit Shifting. Paris: OECD Publishing. 2013. pp. 20–21. ISBN 978-92-64-20271-9.
  20. ^ "Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13 - OECD". www.oecd.org. Retrieved 2017-02-27.
  21. ^ "Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 - 2015 Final Reports | OECD READ edition". OECD iLibrary. Retrieved 2017-02-27.
  22. ^ "Public comments received on the conforming amendments to Chapter IX of the OECD Transfer Pricing Guidelines - OECD". www.oecd.org. Retrieved 2017-02-27.
  23. ^ "October | 2015 | The BEPS Monitoring Group". bepsmonitoringgroup.wordpress.com. 5 October 2015. Retrieved 2017-02-27.
  24. ^ "UN Conference on Trade and Development: Trade Misinvoicing in Primary Commodities in Developing Countries (2016)" (PDF). Archived from the original (PDF) on 2016-10-27. Retrieved 2016-11-23.
  25. ^ "Trade Misinvoicing, Global Financial Integrity".

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