CHUYEN GIA TRANSFER PRICING avcxasd

Definition Arm’s length principle Transaction-based methods of determining arm’s length prices Transaction profits-based methods Other profits-based methods BEPS Transfer pricing documen

CHAP 4

TRANSFER PRICING

LECTURER: Dang Thi Bach Van(MA)

Definition

Arm’s length principle

Transaction-based methods of determining arm’s length prices

Transaction profits-based methods

Other profits-based methods

BEPS

Transfer pricing documentation requirements

• MNEs/ MNCs use transfer prices for sales and other transfers of goods and

services within their corporate group (see ex/p.56)

• Transfer prices are also used by individuals dealing with corporations or other

entities under their control and by individuals dealing with close family members

INTRODUCTION

• A transfer price is a price set by a taxpayer when selling to, buying from, or sharing resources with a related person

•  avoid the income taxes of a country through their manipulation of transfer prices

INTRODUCTION

• Related persons are defined to include two or more persons that are owned or controlled, directly or indirectly, by the same interests

•  They have the ability to set transfer prices that differ from market prices

introduction

• In a well-designed income tax system, the tax authorities should have the power to adjust the transfer

The basic problem illustrated

Multinat Plc has two trading subsidiaries One is tax resident in the country of Konganga where the effective rate of corporation tax is 10% This company extracts and exports greensand, the raw

material used in the group’s production processes The open market price for greensand is $100 per tonne The other subsidiary is

resident in the country of Ruritania, where the effective tax rate is 40% The Ruritanian subsidiary buy its raw materials in bulk from the Konganga subsidiary The quantity purchased each year is

80,000 tonnes

Multinat Plc wishes to instruct the two subsidiaries to adopt a

pricing policy that optimizes the after-tax profits for the group as a whole Questions to be considered are:

• Should the price charged by Konganga be lower or higher than the price it might charge to an unrelated customer?

• Which government might object to the pricing policy and why?See p.434-435

Arm’s length principle

• This principle states that the prices charged within multinational groups of companies or between companies and their permanent establishment must be comparable to those that would be charged between independent enterprises

•  to achieve a fair share of a multinational group’s tax base for all the tax jurisdictions in which it operates by preventing the artificial manipulation of profits for tax purposes earned in various countries through uncommercial pricing practices

Transaction-based methods of determining arm’s length

prices

• Comparable uncontrolled price

• Resale price minus

• Cost-plus

Comparable uncontrolled price - CUP

• The rationale behind CUP is to compare the actual transfer prices with comparable prices applying between unrelated parties

• The main problem with this method is the difficulty in finding an exact match in terms of product, firms, market, risk, geographic location and so forth  this is a controversial practice

• EX 12.2/p444

Resale price minus

• This method tends to be the most appropriate where a group company (Co.A) sells on to another group company (Co.B) which makes the sale to the final (unconnected) consumer with a minimum of processing or otherwise adding value to the goods

• The method works by taking the price charged by Co.B to the final consumer and deducting an appropriate gross margin – the resale price margin

• Ex p.445

Cost plus

• This is popular because it can be applied to transactions where there are no comparable sales of the commodity concerned to independent third parties

• This method takes cost of production plus an “arm’s length” profit

• Ex 12.4/p446

Transactional profits-based methods

A transactional profit method looks at the profits that arise from particular controlled transactions

Two methods are:

• Transactional net margin method

• Profit split method

These methods differ from comparable uncontrolled price, resale price minus and cost plus in that they look at net profit on a

transaction rather than the gross profit

Transactional net margin method

• This method is not really transactional, as it involves a comparison of the earnings before interest and tax of a company suspected of having depressed profits due to manipulative transfer pricing practices with that of unrelated companies in the same country

• Ex 12.5/p448

Profit split method

Aim to split the total profit earned on a transaction by all the group companies involved in it using an “ equitable” formula (eg by

reference to capital employed)

Two steps in applying this method:

• Identifying the profit to be split for the associated enterprises from the controlled (comparable) transactions in which the associated enterprises are engaged

• Splitting those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm’s length

Profit split method

• The principle difficulty is the lack of publicly available information about the likely split of profits

• Used in industries where there is a high degree of vertical integration: group companies supply everything from raw materials, through processing, right up to the finished product,

ex telecommunication, pharmaceuticals and automobile industries

• Ex 12.6/p450

Other profits-based methods

• Where none of the methods considered so far produce an acceptable result, other profit-based methods can be used

• These might include the “ rate of return” method or the use of the Berry ratio, sometimes used in cases where there is a manufacturing company with complicated costs (eg high research and development, and a company which simply acts as

a selling and marketing company)

• See p.454-457

BEPS ACTIONS

The Action Plan required the guidance on its application to be

clarified and strengthened, and accepted that it was possible that special measures may be required either within or beyond the

arm’s length principle

The three key areas dealt with are:

• Intangibles – Action 8

• Risk and capital – Action 9

• Other high risk transactions – Action 10

Transfer pricing documentation requirements

Documentation requirements vary considerably and that attempts

to achieve uniformity have not been very successful

The two-tier structure is recommended comprising a master file and

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