International transfer pricing

Transfer pricing is a perennial issue, within the international tax community (Richard Casna, Accounting and Business, in the year February 1988).

As multinationals become more sophisticated in employing transfer pricing techniques in their tax planning, the revenue authorities have increased their scrutiny of arrangements, putting transfer pricing at the forefront of international tax concerns.

It naturally follows that if profits can be shifted from a high tax jurisdiction to one of low tax through transfer pricing, the tax authorities will respond with rules designed to curtail tax avoidance and ensure tax payer compliance.

Revenue authorities around the globe have become more adept at countering the “profit-shifting” aspects of transfer pricing practices and are strengthening their statutory powers with ever more extensive and complex legislation and regulations.

To strengthen the tax authorities’ position, regulations typically introduce specific rules to determine arms’ length prices and require that tax payers maintain very extensive records documenting the methods used to determine their transfer prices (which often necessitates the employment of teams of both in-house and outside counsel, accountants and economists). Provision is made as well for the imposition of very stringent penalties in cases of non-compliance.

To achieve these ends, the statutes generally focus on guidelines set out by the OECD’s Committee on Fiscal Affairs (the tax policy body of the OECD), first in its 1979 document “Transfer pricing and multinational Enterprises” and the 1995-1996 “Transfer pricing Guidelines for Multinational Enterprises and Tax Administrations.” These guidelines usually stipulate the parameters of the arm’s length pricing standard and the methodology to be followed in achieving arm’s length prices.

The practitioner as adviser to multinationals which faces the complexities of transfer pricing legislative and regulatory controls has therefore to simply consider the statutes in each country/state carefully, comply with the rules and maintain extensive documentation.