Transfer pricing
Introduction
Definition Transfer pricing (controlled transaction/inter-company transaction)= the pricing of transactions
between associated enterprises.
Transfer pricing is not an exact science but does require the exercise of judgment on the part of
both the tax administration and taxpayer
Transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer
mispricing.
Why • The transfer price and conditions of inter-company transaction are not (necessarily) determined
governmental by market forces (=the normal laws of supply and demand)
interest? • A MNE group (=Multinational Enterprise) could artificially shift income to achieve tax benefits
>see example 1 : it shows the effect of transfer pricing 2 formulas:
operating profit / total cost = total cost plus ratio profit and cost
tax / total operating profit= effective tax rate average rate of taxes paid
ALP ► Transfer pricing methods are used to determine whether the conditions are at arm’s length
► ALP=Art. 9(1) OECD MTC
“[When] conditions are made or imposed between the two [associated] enterprises in their
commercial or financial relations which differ from those which would be made between
independent enterprises (this assumes that the transfer prices does not meet the ALP), then any
profits which would, but for those conditions, have accrued (=toenemen) to one of the enterprises,
but, by reason of those conditions, have not so accrued, may be included in the profits of that
enterprise and taxed accordingly” (this means that tax authorities are allowed to correct
transfer prices and the taxation of the associated enterprises based on arm’s length transfer
prices).
1. Associated enterprises? :
► (a) an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the Other Contracting State, or =vertical
► (b) the same persons participates directly or indirectly in the management, control, or
capital of an enterprise of a Contracting State and an enterprise of the Other Contracting
State =horizontal
× Legal control: shareholder rights and voting rights
× Factual control: decision making power
Degree of control has been left to domestic legislation
>see example 2
2.and in either case, conditions are made or imposed between the two such enterprises in their
commercial or financial relations which differ from those which would be made between independent
enterprises < this are the two requierments, then
► any profits which would, but for those conditions, have accrued to one of the enterprises
but by reason of those conditions have not so accrued,
may be included in the profits of that enterprise and taxed accordingly.
Result: economic double taxation: “the inclusion of the same income in the tax base by more than one
tax administration, when the income is in the hands of different taxpayers” > Corresponding
Adjustments paragraph 2 of article 9 OECD >see example 3
Introduction
Definition Transfer pricing (controlled transaction/inter-company transaction)= the pricing of transactions
between associated enterprises.
Transfer pricing is not an exact science but does require the exercise of judgment on the part of
both the tax administration and taxpayer
Transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer
mispricing.
Why • The transfer price and conditions of inter-company transaction are not (necessarily) determined
governmental by market forces (=the normal laws of supply and demand)
interest? • A MNE group (=Multinational Enterprise) could artificially shift income to achieve tax benefits
>see example 1 : it shows the effect of transfer pricing 2 formulas:
operating profit / total cost = total cost plus ratio profit and cost
tax / total operating profit= effective tax rate average rate of taxes paid
ALP ► Transfer pricing methods are used to determine whether the conditions are at arm’s length
► ALP=Art. 9(1) OECD MTC
“[When] conditions are made or imposed between the two [associated] enterprises in their
commercial or financial relations which differ from those which would be made between
independent enterprises (this assumes that the transfer prices does not meet the ALP), then any
profits which would, but for those conditions, have accrued (=toenemen) to one of the enterprises,
but, by reason of those conditions, have not so accrued, may be included in the profits of that
enterprise and taxed accordingly” (this means that tax authorities are allowed to correct
transfer prices and the taxation of the associated enterprises based on arm’s length transfer
prices).
1. Associated enterprises? :
► (a) an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the Other Contracting State, or =vertical
► (b) the same persons participates directly or indirectly in the management, control, or
capital of an enterprise of a Contracting State and an enterprise of the Other Contracting
State =horizontal
× Legal control: shareholder rights and voting rights
× Factual control: decision making power
Degree of control has been left to domestic legislation
>see example 2
2.and in either case, conditions are made or imposed between the two such enterprises in their
commercial or financial relations which differ from those which would be made between independent
enterprises < this are the two requierments, then
► any profits which would, but for those conditions, have accrued to one of the enterprises
but by reason of those conditions have not so accrued,
may be included in the profits of that enterprise and taxed accordingly.
Result: economic double taxation: “the inclusion of the same income in the tax base by more than one
tax administration, when the income is in the hands of different taxpayers” > Corresponding
Adjustments paragraph 2 of article 9 OECD >see example 3
