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Transcript of Transfer Pricing
US. Advanced Pricing Agreement (APA) Program Designed to resolve actual or potential transfer pricing disputes in a cooperative manner.
It is s an alternative to the traditional adversarial process.
It is a binding contract between the IRS and a taxpayer.
IRS agrees not to seek a transfer pricing adjustment for a covered transaction.
Taxpayer has to file its tax return consistent with the agreed transfer pricing method.
• choosing a transfer pricing method (TPM)
• selecting comparable uncontrolled companies or transactions comparables
• deciding on the years over which comparables’ results are analyzed (the “analysis window”), and related matters
• adjusting the comparables’ results because of differences with the tested party
• constructing a range of arm’s length results
• testing results during the APA period, and consequences of being outside the arm’s length range An APA normally requires agreement on these major substantive items: The need for adequate planning and documentation of transfer pricing policies and procedures The potential for carry forward of the impact of unfavourable Revenue determinations, creating further liabilities in future periods;
Secondary tax consequences adding further cost – for example the levy of withholding taxes on adjusted amounts treated as constructive dividends;
Uncertainty as to the group’s worldwide tax burden, leading to the risk of earnings restatements and investor lawsuits;
Conflicts with customs and indirect tax reporting requirements;
Conflicts with regulatory authorities; and
Damage to reputation and diminution of brand value as a consequence of theperception of being a bad corporate citizen. Example Korean firm manufactures a MP3 player for $100, but its US subsidiary buys it for $199, and then sells it for $200. By doing this, the firm’s bottom line does not change but the taxable profit in the US is drastically reduced. At a 30 per cent tax rate, the firm’s tax liability in the US would be just 30 cents instead of $30 Transfer pricing can help to more efficiently manage profit and loss ratios within the company.
Transfer Pricing Guidelines help companies to avoid double taxation and help tax administrations to receive a fair share of the tax base of multinational enterprises. Arm’s – Length Principle An arm’s length transaction is a transaction between two related or affiliated parties that is conducted as if they were unrelated, so that there is no question of a conflict of interest
It is not always possible to find comparable market transactions to set an acceptable transfer price tax evasion
Transfer Pricing Guidelines - OECD Application of arm's length principle.
Administrative approaches to avoiding and resolving transfer pricing disputes.
Special considerations for intangible property.
Special considerations for intra-group services.
Cost contribution arrangements. Managers can save money in multinational companies by
evaluating the corporation’s policies regarding international transfer pricing.
Taxes are affected by transfer pricing and thereby company’s profits.
Transfer prices strategy must be accorded with the taxation policies established by each country. The more informed of international policies a company is, the better decisions it can make. Optimal Transfer Pricing Defined as transfer pricing that maximizes overall firm profits in a non-realistic world with no taxes, no capital risk, no development risk, no externalities or any other frictions which exist in the real world. In practice a great many factors influence the transfer prices that are used by multinational corporations, including performance measurement, capabilities of accounting systems, import quotas, customs duties, VAT, taxes on profits, and (in many cases) simple lack of attention to the pricing. The abuse of transfer pricing mechanisms could be drastically curbed if there is an enhanced international coordination among national tax authorities. Transfer Pricing Methodology
Tangible Property Intangible Property Comparable Uncontrolled Priced Method
Resale Price Method
Cost Plus Method
Comprable Profit Method
Profit Split Method Comparable Uncontrolled Transaction Method
Cost Plus Method
Profit Split Method