TRANSFER PRICING CASE STUDIES
WORKSHOP
SAN JOSE
31 MARCH - 4 APRIL 2014
3-a. Transfer Pricing - Introduction
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1
What is Transfer Pricing?
Manufacturer
Parent Co.
Goods
Wholesale distributor
for Central American
Region
Distributor
for each country
End-Customers
• Is there a transfer pricing issue?
•What are the risks to businesses
and governments?
2
What is Transfer Pricing?
Parent Co
France
Regional
Wholesaler Sub
Mexico
Distribution
Sub
Nicaragua
Distribution
Sub
Costa Rica
Distribution
Sub
Panama
3
Relevance of the Subject
• Approximately 60-70% of world trade is carried on within
Multinational Groups of Enterprises (MNEs)
• Cross-border dimension of transactions...
...due to globalisation and economies of scale
• Transfer prices ... are prices at which an enterprise
transfers goods, services or intangible property to
associated enterprises
What is an “associated enterprise”?
4
Definition of “Associated Enterprises”
• Definition in Article 9 OECD Model Tax Convention:
“Direct or indirect participation in the
– management,
– control or
– capital of an enterprise”
• No minimum level of participation
• Enterprises are associated where:
– one enterprises participates in the management control or
capital the other, or
– the same person(s) participate in the management, control
or capital of both
5
Participation in management, control
or capital
• Potentially quite wide
• Domestic rules may refine or expand what transactions
or arrangements are subject to the transfer pricing
rules
– Shareholding (de jure control): sometimes > 50%
– De facto control, e.g.
•
•
same directors in both enterprises
sole customer or supplier
– Association need not be proven
6
Participation in management, capital
or control
Company A
51%
Company B
Other
shareholders
Are A and C
associated
enterprises?
26%
Company C
7
Control
Company A
51%
51%
Company C
Company B
26%
Company D
Are B and D
associated enterprises?
8
Relevance of the Subject

Reliance on the Arm‘s Length Principle (ALP)...
...contained in Article 9 (1) OECD Model Tax Convention

ALP entails the Separate Entity Approach,
i.e. associated enterprises are taxed as if they were dealing wholly
independently (i.e. at arm‘s length)
 “Where...conditions...in [the] commercial or financial relations
[between the associated enterprises] which differ from those which
would be made between independent enterprises”
 “...profits which would...have accrued...may be included in the
profits of the enterprise and taxed accordingly”
9
OECD MTC and OECD TPG
Arm’s Length Principle*
embodied in Article 9 (1)
OECD MTC
OECD MTC
basis for 3,600
legally binding bilateral
Income & Capital Tax Treaties
OECD TPG
interpretative
tool for Article 9 of the MTC
* Also applicable to the UN Model Double Taxation Convention.
ALP may also be mentioned in legislation (enacted in domestic law),
regulations, rulings, case law or guidelines.
10
OECD Transfer Pricing Guidelines
 Consensus definition of the arm’s length principle
 Pricing methods and guidance used by countries
around the world
11
OECD Transfer Pricing Guidelines
• Chapter I: Guidance for applying the ALP
• Chapter II: Transfer Pricing Methods
• Chapter III: Comparability Analysis
• Chapter IV: Administrative approaches to
avoiding &resolving TP disputes (MAP, APAs, etc.)
• Chapter V: Documentation
• Chapter VI: Intangibles
• Chapter VII: Intra-Group Services
• Chapter VIII: Cost Contribution Arrangements
• Chapter IX: Business Restructurings
12
Transfer pricing and profit shifting
Manufacturer
Country A
Costs = 100
Profit A
50
100
150
200
250
Intra-Group
Transaction
Arm’s Length
Transfer Price
150?
200?
250?
300?
350?
Distribution Subsidiary
Country B
Resale Price = 300
Gross Profit B
150
100
50
0
- 50
Group Profit
200
200
200
200
200
13
Transfer Pricing and profit shifting
Manufacturer
Country A
Costs = 100
Profit A = 150
Tax 10% = 15
Intra-Group
Transaction
Transfer Price
250
Distribution Subsidiary
Country B
Resale Price = 300
Profit B = 50
Tax 30% = 15
Total = 200
Total = 30
14
Transfer Pricing and profit shifting
Manufacturer
Country A
Costs = 100
Profit A = 200
Tax 10% = 20
Intra-Group
Transaction
Transfer Price
300
Distribution Subsidiary
Country B
Resale Price = 300
Profit B = 0
Tax 30% = 0
Total = 200
Total = 20
15
Transfer Pricing Adjustment and
Economic Double Taxation
Intra-Group
Transaction
Manufacturer
Country A
Costs = 100
Transfer Price
300
Profit A = 200
Tax 10% = 20
Distribution Subsidiary
Country B
Resale Price = 300
Profit B = 0
Tax 30% = 0
Total = 200
Total = 20
Transfer Pricing Adjustment by B (50)
250
Profit A reported = 200
Tax 10%
= 20
Profit B adj. =+50
Tax 30%
= 15
Total = 250
Total = 35
16
Transfer Pricing Adjustment and
Economic Double Taxation
Manufacturer
Country A
Costs = 100
Profit A = 200
Tax 10% = 20
Distribution Subsidiary
Country B
Resale Price = 300
Intra-Group
Transaction
Transfer Price 300
Profit B = 0
Tax 30% = 0
Transfer Pricing Adjustment by B (50)
250
Profit B adj. =+50
Profit A reported = 200
Tax 30%
= 15
Tax 10%
= 20
Profit doubly taxed
Total = 200
Total = 20
Total = 250
Total = 35
= 50
17
Elimination of Double Taxation
by Corresponding Adjustment
Manufacturer
Country A
Costs = 100
Profit A reported = 200
Tax 10%
= 20
Intra-Group
Transaction
Transfer Price 300
Profit B adj. = +50
Tax 30%
= 15
Corresponding adjustment by A (-50)
Profit A reported = 200
Corr. adjustment - 50
Profit B adj. = 50
Profit A adjusted = 150
Tax 10%
= 15
Tax 30%
= 15
Distribution Subsidiary
Country B
Resale Price = 300
Total = 250
Total = 35
Total = 200
Total = 30
18
Questions and/or
comments?