Transfer Pricing Study
What is Transfer Pricing?
It consists of prices agreed between companies belonging to the same business group for the exchange of tangible or intangible goods and the rendering of services, which must be determined under the Arm’s Length Principle.
Transfer Pricing Definition
It is the pricing of transactions carried out by companies with their related parties according to normal market values, complying with the Arm’s Length Principle.
Performance and Objective of Transfer Pricing
It prevents the manipulation of prices between related parties, establishing the allocation of value as if these were independent parties.
Transfer Pricing Objectives
The Transfer Pricing aims to ensure that related party transactions are carried under the Arm’s Length Principle, thus facilitating the transfer of assets and avoiding tax evasion or avoidance.
Transfer Pricing Characteristics
They are implemented in various countries through local regulations.
Likewise, the OECD Transfer Pricing Guidelines have established common aspects such as Companies belonging to the same business group or person and the transfer of profits between companies through this price.
Transfer Pricing Relevance
Transfer Pricing is actually essential for multinational companies as well as for tax authorities and countries in general. The following highlights some key reasons demonstrating the Transfer Pricing importance:
- Preventing tax base erosion and artificial profit transfer: Transfer Pricing prevents multinational companies from using related company transactions to divert profits to jurisdictions with a lower tax burden, which could erode the tax base of the countries where the profits are generated. This is essential to ensure multinational companies pay taxes fairly and contribute to the tax coffers of the countries in which they operate.
- Preventing tax controversies and litigation: Correct Transfer Pricing reduces the risk of disputes and litigation between multinational companies and tax authorities. Clear policies and adequate documentation supporting Transfer Pricing improve transparency and provide legal certainty to both companies and tax authorities, avoiding costly legal proceedings and extended litigations.
- Promoting transparency and accountability: Transfer Pricing contributes to transparency in the transaction reporting of multinational companies and their transactions between related companies. This facilitates assessment and monitoring by tax authorities and other regulatory bodies and helps ensure proper corporate accountability.
- Facilitating the exchange of information between jurisdictions: Transfer Pricing requires documentation and specific reporting, which encourages the exchange of information between tax authorities in different countries. This enables greater cooperation and collaboration between jurisdictions to address issues related to profit allocation and aggressive tax planning.
- Establishing a framework for responsible tax planning: Transfer Pricing provides a framework for responsible tax planning by multinational enterprises. By considering international standards and guidelines, companies can structure their transactions consistently with the Arm’s Length Principles and avoid objectionable or abusive tax practices.
In summary, Transfer Pricing is essential to ensure fairness and transparency in the taxation of multinational companies. By properly pricing related company transactions, it avoids tax base erosion, prevents tax controversies, and promotes accountability and international cooperation in tax matters.
Transfer Pricing Benefits
Transfer Pricing, when correctly applied, offers several benefits and advantages for both multinational companies and tax authorities. Some of these benefits are:
- Regulatory Compliance: Transfer Pricing allows multinational companies to comply with the tax regulations and legal requirements of the different countries in which they operate. This helps avoid penalties, fines, and litigation related to tax evasion.
- Equitable profit split: Transfer Pricing ensures the fair and appropriate allocation of income and profits generated by the business activities of a multinational company among the different tax jurisdictions in which this operates. This contributes to avoiding tax base erosion and the artificial transfer of profits to jurisdictions with lower tax burdens.
- Transparency and consistency: Transfer Pricing promotes transparency and consistency in the valuation of transactions between related companies by multinational companies. This eases the understanding and assessment of economic and tax transactions by tax authorities and reduces the risk of disputes and litigation.
- Certainty and legal security: Advance Transfer Pricing Agreements (APAs) provide certainty and legal security to both multinational companies and tax authorities. By establishing Transfer Pricing methods and terms in advance, the risks of Transfer Pricing disputes and litigation decrease.
- Administrative efficiency: Transfer Pricing enables a more efficient management of tax obligations regarding related company transactions. By establishing appropriate policies and documentation, companies can simplify reporting and comply with documentation requirements established by tax authorities.
- Prevention of double taxation: Transfer Pricing contributes to the prevention of international double taxation by establishing reasonable and equitable transaction prices between related companies. This prevents the same transaction from being taxed twice in different tax jurisdictions.
In summary, Transfer Pricing offers significant benefits regarding regulatory compliance, equitable profit split, transparency, certainty, administrative efficiency, and prevention of double taxation. Ensuring that Transfer Pricing properly reflects the economic value of transactions contributes to a fairer and more balanced tax system, either domestically or internationally.
For further information on the regulations in other countries, please search here:
International Transfer Pricing Consulting Services
At TPC Group, we provide Transfer Pricing and Appraisal services under world-class quality standards. We are ISO 9001 certified and internationally endorsed by the International Tax Review – ITR, which chose us as the best practice Transfer Pricing firm in Latin America in a recent international evaluation carried out in 2021.
Our services cover the practice in 20 countries in all aspects related to:
- Transfer Pricing Study
- Local Report
- Master File
- Country by Country Report
- Service Profit Test
- Market Research Range
- Valuation of Companies, Shares, and Intangibles
- Benchmarking (Comparable Search).
- International Taxation
Can I submit my Transfer Pricing study from previous years?
Yes, you can submit a Transfer Pricing study corresponding to the fiscal years 2021, 2020, 2019, or 2018. It will depend on the legislation of the country where your company is located.
Advance Pricing Agreements (APA)
What is an APA in Transfer Pricing?
An Advance Pricing Agreement (APA) is a formal and binding agreement between a multinational company and the tax authorities of a country(s) to establish in advance the transfer pricing method and terms applicable to related company transactions.
The APA mainly aims to provide certainty and legal security to both the multinational enterprise and the tax authorities regarding the application of Transfer Pricing. By entering into an APA, the parties agree in advance on the process for determining transfer prices for a specific period (usually three to five years).
An APA can be unilateral when entered into between the company and the tax authorities of a single country or bilateral/multilateral when the tax authorities of two or more countries are involved. If a bilateral/multilateral APA is entered into, the tax authorities of the countries involved will cooperate to agree on the Transfer Pricing applicable to the cross-border transactions.
In order to apply for an APA, the multinational company must submit a detailed application to the relevant tax authorities, providing complete information and documentation concerning its transactions, business structure, proposed Transfer Pricing methods, and other relevant elements. The tax authorities review the application, analyze it, and, if they consider the requirements to be met, negotiate the APA terms with the company.
The benefits of entering into an APA include:
Certainty: The company obtains advance confirmation regarding the acceptance of its Transfer Pricing policies by the tax authorities during the period covered by the agreement.
Avoidance of controversies and litigation: An APA reduces the risk of Transfer Pricing controversies and litigation, given that the terms have already been agreed with the tax authorities.
Administrative efficiency: It simplifies documentation and reporting requirements related to Transfer Pricing during the period covered by the agreement.
APAs are an important tool in the Transfer Pricing area due to the promotion of transparency, consistency, and efficiency in the Transfer Pricing application, either for multinational companies or the tax authorities.
The Company relies on three main databases to perform the services provided: S&P Capital, RoyaltieRange, and Veritrade.
S&P Capital IQ: It is a comprehensive software for the centralized management of the corporate taxation of multinational companies, including Transfer Pricing. The Capital IQ database relies on coverage of more than 62,000 public companies and 4.4 million private company profiles.
Royaltyrange: This database contains information on contracts related to royalty payments, commissions, intangibles, and goodwill, among others. It collects information on actual transactions and contractual agreements between companies worldwide. This information covers a wide range of industries and sectors, providing relevant and comparable data for Transfer Pricing analysis and valuations.
Veritrade: It is a database that specializes in providing data and statistics related to international trade. This database focuses on Latin American exchange trade and mainly analyzes the imports and exports of different countries in the region, compiling data from customs and other reliable sources to provide accurate and updated information on foreign trade.
Arm’s Length Principle and Transfer Pricing
The Arm’s Length Principle is one of the fundamental concepts for determining transfer prices between related companies.
According to this Principle, related-party transactions should be similarly valued to independent-party transactions, operating under free market and competitive conditions.
In other words, the Arm’s Length Principle establishes that the prices or conditions agreed upon in related company transactions should be consistent with those agreed upon between unrelated parties in similar circumstances.
This is due to the ability of related companies to influence the prices and conditions of transactions between them, which could lead to artificial profit shifting and tax evasion.
The Arm’s Length Principle aims to ensure that Transfer Pricing adequately reflects the economic value of transactions and the fair allocation of revenue between the tax jurisdictions involved.
This contributes to preventing tax evasion and ensuring that multinational companies pay taxes based on their actual economic contribution in each country where they operate.
Approved OECD Methods
The OECD has developed and officially endorses five main Transfer Pricing methods widely accepted by member countries and effectively implemented. These methods are as follows:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price (RP) Method
- Cost Plus Cost (CP) Method
- Profit Split (PS) Method
- Residual Profit Split (RPP) Method
- Transaction Net Margin Method (TNMM)
It should be noted that the selection of the appropriate Transfer Pricing Method depends on the particular circumstances of each case and requires a detailed analysis of the functions, assets, and risks of the parties involved, as well as the availability and reliability of comparable data.
OECD Transfer Pricing Guidelines
The OECD Transfer Pricing Guidelines are a set of principles and recommendations established by the Organisation for Economic Co-operation and Development (OECD).
These guidelines are intended to guide member countries and multinational companies on the Transfer Pricing application, which are the prices used for related-party transactions belonging to different tax jurisdictions.
Some of the main OECD Transfer Pricing Guidelines are summarized below:
Arm’s Length Principle: Related company transactions should be similarly valued to independent party transactions. This implies that the prices or terms agreed upon should be consistent with those agreed upon between unrelated parties in similar circumstances.
Transfer Pricing Methods: Several methods are recommended to determine transfer prices, including the Comparable Uncontrolled Price (CUP) method, the Resale Price (RP) method, the Cost Plus (CP) method, the Profit Split (PS) method, the Residual Profit Split (RPS) method, and the Transactional Net Margin Method (TNMM).
Documentation and Reporting Obligations: Multinational companies are encouraged to maintain adequate documentation supporting their Transfer Pricing policies. In addition, many countries require specific Transfer Pricing reporting.
Transfer Pricing and Risk: Economic risks associated with related-party transactions should be allocated with the economic merits of the business activity and the risk assumption consistently.
Advanced Transfer Pricing Agreements (APAs): OECD member countries encourage companies to request advance Transfer Pricing agreements with tax authorities to avoid controversies and provide certainty on the Transfer Pricing application.
It should be noted that the OECD Transfer Pricing Guidelines are non-binding but widely accepted and referenced by many countries in their tax regulations development and the resolution of Transfer Pricing controversies.
Each country may adapt and interpret these guidelines according to its national tax legislation.
List of OECD Transfer Pricing Guidelines
- OECD Transfer Pricing Guidelines: Please click on the following link to access the updated OECD Transfer Pricing Guidelines: Click here
- OECD Transfer Pricing Documents and Publications: On the OECD website, you can access a variety of technical documents, reports, and publications related to Transfer Pricing. Please visit the following link to explore these resources: Click here