TRANSFER PRICING

Transfer Pricing

Transfer Pricing

Introduction

Transfer Pricing is a powerful tool to move funds from one business unit to another and from country to country, and as such creates opportunities for tax evasions. Loraine Eden, a leading scholar in the field of taxation and Transfer Pricing, clarifies this point: “It is not Transfer Pricing that is the problem; it is the potential for Transfer Pricing manipulation that governments fear and want to prevent through regulation. However what one sees as legitimate forms of price settings may be seen by others as evasive and illegitimate manipulation” (Eden, 2001). This quote presents the problem from a government's point of view. However, looking from a broader perspective, it is not so important which country collects the taxes. Here the major concern is the cases were profits are not taxed at all - as in the case of tax heavens. The issue of Transfer Pricing touches upon the international tax regimes and the commonwealths of states and the OECD that try to suggest and organize the international legal standards. As a final agreement is not within reach, there will continue to be discrepancies between the taxation of internationally traded goods, funds and intangible goods and the public's perception of just distribution of wealth. A key question regarding Transfer Pricing is; what is the right price? And moreover, what is the yardstick for the right price? Finding the answer becomes more difficult when dealing with services and intangibles, were the benchmark is not absolute.

Transfer Pricing Effect

The mechanics of Transfer Pricing will be explained. Furthermore the question why Transfer Pricing has such importance will be addressed. The issue of incentives or motives for using Transfer Pricing as an instrument will be examined. In this section a simple example of how Transfer Pricing could work in practice and the main uses of Transfer Pricing will be discussed. Relating to this the main motives for regulatory steps in curbing transfer pricing policies will be addressed in the same section. Looking at the project in its entirety, this is where emphasis is put as this constitutes the very core of the issue. Solid empirical background is demanded as well as analytical skills for fulfilling our ambitions.

When speaking of international tax regulation Transfer Pricing and double taxation are the two core concepts in question. This report will not provide a thorough explanation of the issues concerning double taxation, but the concept will be briefly addressed whenever found relevant. Although often interlinked, the two concepts can justifiably be separated. Both are integral parts of the OECD Model Tax Convention from 1963 (www.oecd.org, 2004). The Convention proved sufficient to address double taxation issues, but fell short of dealing properly with Transfer Pricing. Thus, the OECD guidelines were introduced, and it is here that the emphasis of this report concentrates on.

To begin explaining what international Transfer Pricing actually is is for the most part very difficult since it is such a vast and ungraspable concept. The definition offered above only explains the fundamental idea or ...