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Transfer Pricing
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It is generally considered that currently transfer pricing issues account for more
major tax cases worldwide than all other tax issues put together, and that as many
as 80% of the world’s big tax cases turn on pricing.
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The Context of the Problem
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In most groups of companies it is common for intra-group trading to take place and
for intra-group services to be performed for both business and tax purposes.
If it were not for transfer pricing rules, no member of a group of companies need
ever pay more tax than it wanted to. All profits could be simply dropped off in
sister companies in tax havens.
In the absence of transfer pricing restrictions, it would be possible, for example:
- For a group to pay away to its offshore captive insurance company the bulk of its
income in the form of inflated premiums for covering improbable risks; or
- For the offshore buying company of a group to add an exaggerated margin on its turn
on purchases from third parties and its sale of the same product to the related
onshore company.
With over 25 percent of the world’s trade taking place within multinational enterprises
(MNEs), it is inevitable that transfer pricing has become the key international
tax issue. This growth of MNEs presents increasingly complex taxation issues for
both tax administrations and the MNEs themselves, since separate country rules for
the taxation of MNEs cannot be viewed in isolation but must be addressed in a broad
international context.
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Next - The Arm’s Length Principle
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