The Relationship between Inflation and Transfer Pricing, according to CIAT

March 27, 2023

The Executive Secretary of the CIAT (Centro Interamericano de Administraciones Tributarias – Inter-American Center of Tax Administrations), along with the German Federal Ministry for Economic Cooperation and Development and the International Tax Compact, prepared a study to evaluate the effect of inflation on Transfer Pricing processes and adjustments. 

1. Background

Over the years, inflation has become a major issue for countries’ economies due to the inflationary context the world is facing. Therefore, this study was carried out by four experts from Venezuela, Ecuador, and Argentina and some Tax Administrations, specifically from Chile, Spain, Peru, Dominican Republic, Uruguay, and South Africa.   

2. Transfer Pricing and Inflation

Although this study was published in 2013, it is important to understand the context back then regarding the inflation indexes of the countries within the region. This risk variable became a valid reason for analysis and study regarding its incidence when analyzing Transfer Pricing.  

In order to understand such incidence from the Transfer Pricing control, it is necessary to understand that inflation can affect the analysis of the Transfer Pricing manipulation in several aspects based on the chosen methodology and technical adjustments.   

It may vary depending on the method, i.e., it may range from a direct incidence in the analysis when comparing prices to an indirect incidence when comparing profit margins of related transactions versus independent ones.  

Hence, it is evident that the incidence of inflationary effects in the Transfer Pricing manipulation may be present in the structuring of prices and the Transfer Pricing analysis. 

3. Transfer pricing Adjustments and Inflation

Generally, Latin American multinational companies carry out comparability studies with companies in other markets, for which it is necessary that such markets are effectively comparable and, therefore, it will be accepted that, in some cases, adjustments are made to consider specific aspects of the market, such as inflation rates.  

In this context, the incidence of inflation on Transfer Pricing should be evaluated as a circumstance that distorts the comparability of goods, services, and/or profit obtained by the tested companies and that may require an adjustment at the level of revenues, costs, expenses, or gross or net operating results, depending on the method employed. 

4. Conclusions

Among the conclusions stated in this study, we highlight the most relevant ones: 

  1. Inflation as a single variable in the calculation of the Transfer Pricing adjustment has a direct incidence on its result, i.e., inflation can lead a taxpayer within the Arm’s Length range and who complies with the respective principle to make an adjustment that will imply taxation thereon affecting his/her economic reality negatively.  
  2. Thus, there is no technical development related to guidelines and parameters applicable to adjust comparability before inflationary contexts. 
Source: Centro Interamericano de Administraciones Tributarias 27/03/23