Transfer Pricing
Understanding Transfer Pricing: IBFD's Solutions for Compliance and Optimized Tax Positions
What is transfer pricing?
Transfer pricing refers to the pricing of goods, services, and intangibles sold between related entities (e.g. a parent company and its subsidiary and affiliate companies). Pricing strategies used in related-party transactions can provide tax advantages to the multinational corporation that at times undermine the fairness and integrity of tax systems.
The main international standard for assessing prices is the arm's length principle, which provides that controlled transactions between related companies should be priced as if the companies were unrelated. That is, multinational corporations should price intercompany transactions as close to fair market value as possible.
Understanding the impacts of transfer pricing on taxes
The pricing of controlled transactions has a fundamental impact on international tax, as it often leads to disputes between multinational corporations and tax authorities. Pricing issues can also lead to increased regulatory scrutiny, impacts investment decisions, and can result in penalties for non-compliance.
Transfer pricing strategies have the potential to artificially lower the net tax liability of multinational organizations by shifting profits to low-tax jurisdictions and deductions to high-tax jurisdictions.
To combat evasive pricing strategies, most taxing jurisdictions employ the arm's length principle as a tool to ensure prices reflect the economic realities of the controlled taxpayer’s particular facts and circumstances (i.e. the market price). The arm's length principle requires related entities to set transfer prices for goods, services and intangibles that are consistent with prices set by unrelated entities under similar circumstances.
Tax authorities may audit companies when pricing strategies are not in line with with the arm's length standard. A transfer pricing audit could lead to an adjustment of the taxable profits by the tax authority, corresponding adjustments by tax authorities in other jurisdictions, and possibly secondary adjustments necessary to resolve any discrepancies caused by the initial adjustments
Transfer pricing methods and approaches
A company can typically choose its transfer pricing method for determining an appropriate arm’s length price or range of prices, based on comparing the terms or net operating profits of the controlled transaction with those of comparable transactions (i.e. companies in comparable circumstances or the same circumstances and transacting in similar goods and services) in the marketplace.
The first three methods are the traditional transaction methods:
- Comparable Uncontrolled Price method;
- Cost-Plus method; and
- Resale Minus method.
The additional methods are the transactional profit methods:
- Transactional Net Margin method; and
- Profit Split method.
Why is it important to keep up to date with transfer pricing?
Given the ever-changing legal field of transfer pricing and its impact on day-to-day business operations, tax practitioners should keep abreast of the latest trends and developments. After all, failure to adhere to relevant laws and guidelines can result in an increased risk of penalties, transfer pricing audit, litigation, accrued interest, or price adjustments.
The OECD's guidelines on a multinational enterprises transfer pricing practice
In recent years, various organizations, most notably the OECD, as well as many taxing jurisdictions have updated their guidelines, regarding appropriate transfer pricing methods, transfer pricing audits, and resolving transfer pricing disputes for cross-border transactions. These developments in part have been influenced by a global trend toward transparency in cross-border transactions.
As of November 2023, 145 international taxing jurisdictions have committed to the OECD's Base Erosion and Profit Shifting (BEPS) Project, which is focused, in part, on addressing tax planning strategies used by multinationals to reduce their corporate income taxes. This Project aids in the elimination of nontaxation of profits without subjecting companies to double taxation.
Much of the work done by the international community is reflected in the 2022 OECD Transfer Pricing Guidelines, which were updated to include revised guidance on the application of the transactional profit method and hard-to-value intangibles, as well as new guidelines on financial transactions.
Transfer pricing issues and challenges after BEPS 2.0
As the OECD moves forward with BEPS 2.0 (Pillar One and Pillar Two), various taxing jurisdictions have taken steps in response to this initiative. As transfer pricing documentation and compliance requirements continue to increase in complexity and as more automatic exchanges of information agreements are signed, more data will be exchanged between tax authorities across the globe. Further, tax authorities have heightened their scrutiny of transfer pricing risk management and modified audit processes for tax purposes. Therefore, it is crucial to have a comprehensive understanding of the latest transfer pricing tax laws. IBFD's transfer pricing resources are designed to help tax professionals in multinational companies and their advisers navigate the challenges of transfer pricing.
Increasing numbers of transfer pricing disputes
In the past few years, there has been a rise in transfer pricing disputes concerning:
- benchmarking analysis, which is the selection of comparables and the application of appropriate transfer pricing methods;
- business restructurings, including whether correct compensation has been paid and the issue of potential exit-fee charges;
- attribution of profit to permanent establishments, which concerns whether a permanent establishment exists and whether any attribution of profits or deductions is correct;
- the pricing of intra-group loans, guarantees and cash pooling arrangements;
- for services transactions, whether a service has been provided, whether there has been a tangible benefit and whether the level of charges paid actually corresponds to the value of the services received; and
- for intangible transactions, an evaluation of whether IP has been transferred, and the application of the DEMPE functional analysis.
IBFD's transfer pricing services and offerings
IBFD offers top-class transfer pricing resources including databases, a transfer pricing journal article collection, online courses, and books. Stay up to date with the latest in transfer pricing when you subscribe to the Tax Research Platform to assist you in making well-informed decisions.
Make your transfer pricing research easy
IBFD provides international tax practitioners with detailed information on the transfer pricing legislation and guidelines in 69 jurisdictions. This includes in-depth coverage of various topics such as comparability analysis, benchmarking, transfer pricing methods, business restructuring issues, intra-group financing, audit preparation, dispute resolution, intangibles, advance pricing agreements, litigation and transfer pricing concerning indirect taxes.
Transfer pricing tables and charts
Cut your research time down with IBFD's transfer pricing tables and easily access specific variations from the OECD Transfer Pricing Guidelines on a country-by-country and local basis. These tables cover 69 taxing jurisdictions, with regard to the transfer pricing legal framework, methods and benchmarking information, transfer pricing risk management (e.g. audits and transfer pricing adjustments), transfer pricing controversy (e.g. APAs and MAPs), and transfer pricing guidance on special transactions. Our transfer pricing documentation tables also include deadlines and penalties for 128 jurisdictions, and more information, such as access to treaties, models, glossary and a news service, to name a few.
Transfer pricing training
IBFD offers comprehensive online courses in the field of transfer pricing. With both an introductory level (topics include: fundamentals, basic issues ranging from transfer pricing definition principles to methods to determining a transfer price, and so on) and an intermediate level (topics include: benchmarking and valuation, transfer pricing and intra-group services, intra-group financing, intangibles, business restructuring, controversy, indirect taxes and operational transfer pricing), you'll learn the latest and most up-to-date information, guiding your understanding of transfer pricing.
Other transfer pricing offerings
Along with our many transfer pricing offerings, IBFD's topical collections, covering the topics of business restructuring, intra-group financing, dispute resolution, and customs valuation offer expert guidance on transfer pricing-related issues in these specialized areas.
We also offer our Transfer Pricing Journal Article Collection. With a focus on analyzing complex cases occurring worldwide, this collection serves as a valuable source in interpreting ever-changing regulations and anticipating possible issues that may arise.
Finally, don't miss our many books.
