Transfer Pricing Services

To tackle the issues that arise in the transfer pricing area, the OECD has issued guidelines that contain recommendations for multinational companies and tax authorities; OECD international guidelines are based on the arm’s length principle. What is the connection between arm’s length and the requirement that a transfer price between affiliated parties should be similar to the market price for similar transactions?

There’s a simple explanation – when two people are close (affiliates) they tend to hug each other. The TP theory states that these two individuals should act as if they did not know each other (independents) and during a transaction just shake hands and keep each other…at arm’s length

Recently, there has been a wide international focus on transfer-pricing practices. Various international developments, such as political pressure at the level of G20/G8 and OECD, make that transfer pricing guidelines are becoming more strict and complex. To understand this development better, read our article what is BEPS.

Governments consider unrealistic profit shifting a major problem and have taken it head-on. If you don’t follow the rules you take a substantial risk. And it is important to note that the rules apply even if you’re not trying to avoid taxes.

Transfer pricing disputes between taxpayers and tax authorities generally cover multiple financial years and can therefore substantially affect the financial position of a company.

An example is the ‘deal’ that pharma giant AstraZeneca concluded with the UK tax authorities (HRMC) and the IRD. This considered a transfer pricing dispute covering 13 years. Eventually, AstraZeneca paid an amount of USD 1.1bn to settle the dispute (more on Reuters).

Not all enterprises have such big exposures. But for small and medium enterprises doing business internationally, a transfer pricing dispute can become quite costly as well!

Transfer pricing rules around the globe are quite similar. At the same time, there are different focus areas in specific countries. Generally speaking, pricing regulations impose a number of obligations on your firm if it has controlled transactions (sometimes revenue thresholds apply):

1. Your firm should be able to prove that the terms and conditions of internal transactions are comparable to those which would have been agreed in the free market when concluding comparable transactions (referred to as “arm’s length”).

2. Your firm should keep documentation on record which shows:

• How the transfer pricing has been established and
• Whether the transfer pricing is in line with the arm’s length principle.

3. Your firm should file annual (corporate) tax returns based on arm’s length terms and conditions of controlled transactions.

The obligations may seem straight forward. But in practice, taxpayers often spend a lot of time and effort in making sure these are met. For example, a transfer pricing analysis which aims to meet the second obligation mentioned above can span more than 100 pages!

You first have to ask yourself the question: What are we doing now?

As a first step, it is good to look at what internal transactions your firm has and which associated enterprises are involved. This does not only include the “visible transactions” such as supply of goods and provision of services. It also includes “invisible transactions” such as group guarantees provided to external banks.

As a next step, you would need to verify whether the terms and conditions of internal transactions are in accordance with the arm’s length principle and whether this can be substantiated.

In a lot of cases, the conditions of internal transactions are equally applied to external comparable transactions (example: a firm sells a product at the same price to both associated entities and third parties). That is in itself a sound basis to take the position that the transfer pricing is at arm’s length.

The last step would be to determine whether transfer pricing documentation needs to be prepared. This depends on steps 1 and 2, but also on local legislation. For example, in Vietnam, a company is exempted from preparing transfer pricing documentation if the revenue is below VND 50bn (approx. USD 2.2m) and when transactions with related parties are below VND 30bn (approx. USD 1.3m).

There are two ways the word BEPS is used. The first is the literal way:

1. What Is BEPS – Literal meaning

• BEPS is an abbreviation of four words. BEPS stands for: Base Erosion and Profit Shifting. This, in turn, refers to two common practices for multinationals to lower the taxes that they pay (notably: corporate taxes).
• “Base erosion” refers to the practice of reducing the taxable base. An example is deducting large interest payments to lower the taxable profits.
• “Profit shifting” refers to the practice of shifting taxable profits from high-tax countries to low-tax countries. An example is the transfer of ownership of intellectual property and its income from the US (high-tax) to Bermuda (low-tax).
• International organizations like the OECD have labeled Base Erosion and Profit Shifting as a major issue. This leads us to the other way in which the word “BEPS” is often used.

2. What Is BEPS? Conceptual meaning

• Do you remember when the news told us that Starbucks, Google, Yahoo and Amazon paid very little corporate income tax in the UK? Well, this triggered more than a public outcry.
• It motivated a lot of busy bees at international organizations to “do something” about Base Erosion and Profit Shifting. The goal in mind is to have multinationals pay their “fair share” of taxes.
• Since then, various noteworthy initiatives have been launched:

- The first one was the publication of an initial report on BEPS by the OECD on 12 February 2013. This report detailed the magnitude of base erosion and profit shifting and global developments in the field of corporate tax.
- This was followed by an extensive “Action Plan on BEPS,” published by the OECD on 19 July 2013. This plan provided 15 action points to tackle “weaknesses” in the existing international taxation principles. The plan was endorsed by the Finance Ministers of the G20.
- On 16 September 2014, the OECD published the first “deliverables” of the Action Plan. This was the first set of recommendations addressing the first 7 action points in the BEPS action plan.
Following the initiatives of the G20 and OECD, the UN has also taken action on BEPS by creating the UN Subcommittee on BEPS. Its main purpose is to include the views and input of developing countries into the Action Plan.
- On 28 January 2016, the European Commission issued its proposal for a Council Directive dealing with tax avoidance practices within the EU. The so-called Anti-BEPS Directive, is based on the recommendations of the OECD.
- In addition, there is an ongoing stream of recommendations and deliverables to tackle the various Action Points.

To summarize: a number of initiatives have been started to prevent Base Erosion and Profit Shifting. Based on these initiatives and their output, a number of new policies have been created. These policies are now being implemented worldwide.

In the realm of tax advisors, these developments are collectively referred to as… BEPS!

This is why you can see articles like “the impact of BEPS on jobs” or “Practical business implications of BEPS.”

But remind yourself that these kinds of articles explain the impact of BEPS regulation on businesses, NOT the practice of BEPS by multinationals.

The Organisation for Economic Co-operation and Development (OECD) is a group of 34 member countries that discuss and develop economic and social policy. OECD members are democratic countries that support free-market economies.

The Organisation for Economic Co-operation and Development (OECD) is variously referred to as a think tank or monitoring group. Its stated goals include fostering economic development and cooperation, fighting poverty, and ensuring the environmental impact of growth and social development is always considered. Over the years, it has dealt with a range of issues, including raising the standard of living in member countries, contributing to the expansion of world trade and promoting economic stability.

The OECD was established on Dec. 14, 1960, by 18 European nations plus the United States and Canada. It has expanded over time to include members from South America and the Asia-Pacific region. It includes most of the highly developed economies.

The OECD publishes economic reports, statistical databases, analyses, and forecasts on the outlook for economic growth worldwide. Reports are variously global, regional, or national in orientation. The group analyzes and reports on the impact of social policy issues such as gender discrimination on economic growth, and makes policy recommendations designed to foster growth with sensitivity to environmental issues. The organization also seeks to eliminate bribery and other financial crime worldwide.