In recent years, international trade and investment have expanded significantly, increasing multilateral transactions between business groups in different territories.
The internationalization of business groups, which expand through subsidiaries or other corporate forms, has led to the regulation of Transfer Pricing between parent-subsidiary and/or related parties for the creation of a fair and competitive market under the Arm’s Length principle and Market rules to prevent multinationals from using their pricing policy to be taxed in States with lower or zero tax rates.
Likewise, the efforts of different countries to attract foreign investment to their territories through low or zero taxation have encouraged multinationals to set up in those countries to benefit from lower tax rates and generate profits through transfer prices non-compliant with the Arm’s Length Principle, taking advantage of their incentives.
The impact of Transfer Pricing on international trade is a fundamental aspect of global business planning. About two-thirds of cross-border transactions are between related companies forming part of the same multinational group, making it an unavoidable necessity to keep the prices of inter-company transactions at market conditions. Pressure from international and regional organizations, as well as local tax administrations, demands full compliance with the Arm’s Length Principle.
In this regard, the growth of multinational companies has increasingly generated complex tax issues both for tax administrations and multinational companies themselves, making the need for a homogeneous regulation internationally on tax aspects of related-party transactions more latent since taxation rules cannot be isolated by each country but must be approached in a broad international context.
Advantages and Disadvantages
On the one hand, multinational companies must comply with legal and administrative requirements that probably change from one country to another, creating additional problems, such as higher compliance costs than those that a similar company operating solely within a single tax jurisdiction would incur.
In addition, specific problems may arise for tax administrations both politically and practically.
Furthermore, one of the most important instruments in international tax planning is the reduction of the tax burden on the income earned by multinational companies through the correct use of Transfer Pricing.
Conversely, homogeneous or typical anti-transfer pricing tax regulation between multinational-related entities can rarely be referred to despite the efforts to generate homogeneity globally on a Transfer Pricing regulation. There is a great difference between state tax regulations reacting against Transfer Pricing practices. This difference is reflected both in the form and the content, as well as in the scope, the dimension and degree of complexity, the primary and secondary effects both in the formal requirements and procedures, the procedures for their application, the different degree of their administrative requirement or even in the degree of preparation and predisposition of the Administration to use the legal mechanisms at its service, only to mention the two most important differential aspects.
What does the Transfer Pricing Analysis Aim to Achieve in the International Market?
The manipulation of the prices agreed in related international company transactions causes an erosion of the taxable base on which income taxation is established, hence the interest of the tax authorities in ensuring that transactions are at Arm’s Length prices and that the taxable base in each jurisdiction is correct.
However, we must consider that Transfer Pricing can affect either international or domestic transactions, excluding problems of international double taxation. Therefore, international Transfer Pricing is more difficult to deal with because it involves more than one tax jurisdiction and, therefore, any Transfer Pricing adjustment in one jurisdiction implies the relevant correlative adjustment in another jurisdiction. Nevertheless, if the other jurisdiction does not agree to make a correlative adjustment, the multinational group will be taxed twice on this part of its profits.
Therefore, an international consensus on determining the Transfer Pricing of cross-border transactions for tax purposes is essential to reduce the risks of double taxation. Consequently, international Transfer Pricing transactions should be given the highest priority for analysis.