subject: Transfer Pricing: A Big Headache? [print this page] Transfer Pricing: A Big Headache? Transfer Pricing: A Big Headache?
Transfer pricing is used to describe pricing arrangements between companies that relate to transactions between similar business entities that include tangibles and the transfer of intellectual property along with different financing transactions such as loans. For tax administrations and taxpayers, transfer prices are important. Transfer prices help establish the expenses and income of relating enterprises and therefore help determine their taxable profits in different tax jurisdictions. ("Transfer Pricing:", 1)
Transfer pricing is not a new concept. Since the 1930s, one of the features of tax systems has been adjustments due to transfer pricing. While the concept of transfer pricing has been around since the 1930s, it has changed a bit since then. As a matter of fact, in 1995, the OECD the Organisation of Economic Co-operation and Development, issued the current set of comprehensive transfer pricing guidelines that are still followed by many countries today. From 1995 until the present, the transfer pricing guidelines have barely changed. ("Transfer Pricing Perspectives:", 15)
Due to the increase in trade internationally, along with the growing impact transfer pricing has on corporate income taxation and also the numerous developing economies around the world that have been growing and expanding, transfer pricing strategies have attracted a high level of international attention. Because of the high level of attention, tax authorities from all over the globe have become more aggressive in the realm of transfer pricing. This aggression has caused there to be new documentation requirements and stricter penalties for transfer pricing guidelines. ("Transfer Pricing:", 1)
During the last few years, the OECD has been working diligently to supply a revision of their guidelines and provide additional guidance on transfer pricing methods and business restructuring. ("Transfer Pricing Perspectives:", 13) With the use of the existing guidelines, many issues have arisen. The additions and changes that the OECD have made to the current transfer pricing guidelines should be able to provide a clearer image for tax authorities and taxpayers on how they should handle their transfer pricing interactions in the future. ("Transfer Pricing Perspectives:", 15) The new guidelines include requirements that multinational companies need to have more proof that internal transactions are conducted at arm's length. (Shaw, 1) Under the arm's length approach, a price would be considered appropriate if, under certain terms and conditions, the price is inside a certain range of prices that an independent seller would get from an independent buyer for an identical item.
Transfer pricing has become more scrutinized over the last couple of years due to the global recession. Many countries have been looking for ways to raise their revenue. The area of transfer pricing has become one of the favorite areas to look at because according to Larry Harding, CEO of High Street Partners, transfer pricing is "the lowest-hanging fruit, because it's very subjective and most companies don't have adequate documentation to back up their assertions." (Stuart, 1) In other words, corporations have been getting away with their transfer pricing practices, but now countries are putting more emphasis on looking at and regulating transfer prices, so they can gain more income.
Because many multinational companies have manufacturing investments in China, transfer pricing policies are increasing in importance due to the fact that part of the companies' revenues come from the investments in China. The transfer pricing guidelines created by the OECD have been followed by many countries but recently that has changed for China. China has specific tax rules that differ from the guidelines. Before 2009, China generally followed theOECD guidelines but new guidelines were announced in 2008 and issued in 2009 by SAT, State Administration of Taxation. China's guidelines differ materially from the previous guidelines but still apply to transactions that happen internationally and within the country. In the past, China's tax authorities have focused transfer pricing matters on the purchase and sale of tangible goods. But due to the growing economy in China, tax authorities have become increasingly interested in transfer pricing issues that involve cross-border services. ("Transfer Pricing Perspective:", 33)
Due to the increasing change in the markets that companies operate in, it is imperative for each company to have a logical transfer pricing policy that is indicative to the ever changing market. Because of changes that could occur in the business, the companies should review their policies on a regular basis and also create new transfer pricing policies, if need be, in a timely manner so that way they can be more efficient and up to the proper standards.
