Part 1 - AL-Tax

Chapter 6Transfer pricing refers to the pricing of goods, services, capital and technologyinputs, managerial skills, financial services, shared/support services, etc. if theyare transferred between affiliates of MNCs. With respect to today’s global businessstructures, intra-group transfers of technology, management services, and financialloans move around within the MNC family. Intermediate goods such as parts,components, and sub-assemblies flow downstream for further processing withinthe boundaries of the MNC (or coordinated by it) before a final sale to third partiesgenerates revenue at the outbound side of the multinational organization (Bto-Cor B-to-B). At the same time, some affiliates may provide shared services togroup business services (legal, accounting, advertising, IT, etc.) on behalf of thegroup, or its headquarters (Eden, 1998; Eden and Kurdle, 2005; Brem and Tucha,2006).In tax terminology, the pricing of intra-group transactions is normally assessedby means of so-called transfer pricing methods (TPMs), of which at least six categoriesare internationally recognized for tax purposes. 3 The basic framework forapplying TPMs is provided by the internationally accepted ‘arm’s length principle’(ALP) (OECD, 1995a, Article 9(1)), which provides that a transfer price shallbe in accordance with a price the two parties would have agreed on as third partiesin a comparable market transaction. With respect to the comparability of relatedpartytransactions and market transactions, and given the limitations in comparabledata availability, the combination of ALP and TPMs provides much roomfor interpretation, discretionary power, design options, and transfer price manipulation,affecting the tax base allocation.With the emergence of national documentation requirements implemented byan increasing number of national tax authorities to enforce ALP (OECD, 1995a),MNCs are now becoming increasingly aware of the need to set appropriate(‘nonmanipulated’) transfer prices for delivering goods and services within anMNC. However, intra-group transactions are regularly associated with intra-groupintangible trade, such as patents, trademarks, financial services, etc. This oftenleaves both the taxpayer and the tax authorities puzzled on pricing individualrelated-party transactions and/or offsetting with other related-party transactions.Also, various facets of tangible related-party transactions (e.g. goods, services)open a wide range of possible interpretations as to what is the appropriate arm’slength transfer price.As a consequence, almost any transfer price is potentially exposed to uncertaintyas to whether it is assessed arm’s length or not and, if not, to what extentthe income from such related-party business will be adjusted by tax authorities.This tax uncertainty is even more striking since the feedback from the tax authority115