Transfer pricing in Several Industries

March 20, 2023

Transfer Pricing has emerged due to the phenomenon of globalization, the internationalization of companies, and technological development. This set of variables has allowed multinational and transnational companies to increase their control over production and trade, which means economic power that enables them to better adapt to regulatory frameworks and deploy sophisticated strategies to reduce their global tax burden.

One of the most employed strategies to maximize profits of multinational companies is the manipulation of their transfer prices to establish (at convenience) taxable bases, thus minimizing or maximizing the tax payment, taking advantage of the existing difference in the tax burdens of the countries where the multinational group operates. These practices are considered illegitimate due to the negative effects they have on the countries’ tax collection. The generally accepted regulatory framework to correct the problems of price manipulation and double taxation is established in the OECD Guidelines for Transfer Pricing.

Concerning the air transportation service, multinational companies may focus their transactions on intra-group transactions and, in particular cases, on transactions involving intangible assets. In terms of comparability of transactions, the air transport service should not approach the analysis of functions such as design, manufacturing, or assembly, given that these are specific functions of companies whose business line is the production of goods. Conversely, the analysis of the other functions should be strictly performed under the OECD guidelines to establish better-supported results and efficiently determine transfer prices on their related transactions.

According to the application of the methods to determine transfer prices, the analysis determined that the best method to determine transfer prices is the Comparable Uncontrolled Price due to the characteristics of the transactions inherent to the air transportation service and the relative availability of the existing comparable information. Conversely, the application of other methods, such as the Resale Price or the Profit Split, is not ruled out, which would be more effective for sales commission operations of airline tickets, mainly.

Concerning the mining industry, mining projects involve fixed physical transactions related to location and standard commodities with international prices. These unique characteristics, along with special Transfer Pricing rules and anti-avoidance measures, should significantly reduce the risk of tax base erosion in the mining sector.

On the other hand, the local standard suggests that the valuation be performed through the Comparable Uncontrolled Price (CUP) method. Conversely, the use of any other Transfer Pricing valuation method must be supported by a technical report, thus documenting and supporting the economic, financial, commercial, and other reasons for the implementation of a methodology other than the CUP.

Therefore, we can conclude that Transfer Pricing in several industries will have different types of characterization and, accordingly, the industries will be able to consider the different methodologies to evaluate the intra-group transactions.