What is transfer pricing?

  

WHAT IS TRANSFER PRICING?

Article – June 2017 | RoyaltyRange

Lukas Balciunas, Manager
Lukas Balciunas, Manager

The term ‘transfer pricing’ refers to the amount of money that is exchanged when two or more related company entities transact with each other. It is generally used in relation to multinational enterprises (MNEs) with multiple subsidiaries or divisions that can transfer intangible assets internally. To give an example, an MNE like Chevron Corporation has many subsidiaries – Texaco, Saudi Arabian Chevron Inc and Chevron Australia Pty Ltd, to name a few – all of which are able to transact with each other. So, transfer pricing is the amount that the related entities under common ownership decide upon for the internal exchange of intangibles, resources or services.

Transfer pricing regulations and guidelines

MNEs need to be sure that they are complying with international regulations on transfer pricing, such as the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiative. To do so, they must adhere to the arm’s length principle (outlined below). There are also official guidelines to help developing countries (e.g. South Africa, Brazil and Mexico) overcome the challenges associated with the lack of comparables data available for transfer pricing purposes and the accurate valuation of intangibles. They include A Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses (released in 2017 by the Platform for Collaboration on Tax) and the United Nations Practical Manual on Transfer Pricing for Developing Countries (2017).

Lukas Balciunas, Manager
Lukas Balciunas, Manager

The arm’s length principle

In order for MNEs to comply with international regulations and standards like the OECD BEPS, they need to meet the arm’s length principle when it comes to transfer pricing. The arm’s length principle is the condition that the price charged for a transaction between two related parties (e.g. Texaco and Chevron Australia Pty Ltd) must be equal to what it would be should the transaction have occurred on the open market between two independent, unrelated parties. The arm’s length principle ensures that an MNE’s tax obligations cannot be lessened or avoided through strategic internal trading. With the rise of globalization, the implementation of the arm’s length principle to stop unjust transfer pricing practices is being recognized as essential by economists, politicians and the business community alike.

Transfer pricing benchmarking

RoyaltyRange prepares benchmarking studies that analyze comparable license agreements and royalty rates to help organizations identify whether their internal company transactions adhere to the arm’s length principle. Our data is fully compliant with OECD BEPS guidelines.

To request a transfer pricing benchmarking study, a full transfer pricing documentation or find out more about our royalty rates database, contact us at RoyaltyRange today.

Lukas Balciunas, Manager

 

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