Transfer pricing refers to the
terms and conditions surrounding transactions within a
multi-national company. It concerns the prices charged
between associated enterprises established in different
countries for their inter-company transactions, i.e.
transfer of goods and services. Since the prices are set by
non independent associates within the multi-national, it may
be the prices do not reflect an independent market price.
This is a major concern for tax authorities who worry that
multi-national entities may set transfer prices on
cross-border transactions to reduce taxable profits in their
jurisdiction. This has led to the rise of transfer pricing
regulations and enforcement, making transfer pricing a
major tax compliance
issue.
Background
According to international standards
individual group members of a multi-national enterprise must
be taxed on the basis that they act at arm's length in their
dealings with each other. This arm's length principle is
found in article 9 of the OECD Model Tax Convention:
"[When] conditions are made or imposed
between ... two [associated] enterprises in their commercial
or financial relations which differ from those which would
be made between independent enterprises, 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."
In The Company Tax Study (SEC(2001)
1681 (pdf
2.0 MB)
(2.0
MB)
),
the Commission identified the increasing importance of
transfer pricing tax problems as an Internal Market issue:
although all Member States apply and recognise the merits of
the OECD "Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations", the different
interpretations given to these Guidelines often give rise to
cross border disputes which are detrimental to the smooth
functioning of the Internal Market and which create
additional costs both for business and national tax
administrations.
