Transfer Pricing Regulation: The International Concept

Transfer pricing (TP) legislation around the world has a single key objective: to ensure that the tax base is properly calculated when the parties to a transaction have the ability to manipulate transaction prices. In particular, it aims to prevent related parties from agreeing to terms and conditions that result in tax avoidance, such as shifting transactional profits to jurisdictions with lower tax burdens.

Transfer pricing rules are set and commonly used to set the rules of the game. The core base of TP regulation is an arm’s length principle, which means that the results of a transaction or arrangement should be consistent with what would have been achieved if unrelated parties had engaged in a similar transaction or arrangement under similar circumstances.

TP law usually contains such concepts and definitions of terms as:

1. related parties (usually the parties that have an impact on one another),
2. controlled transactions (transactions subject to TP control by local regulatory authorities),
3. TP methods (a way of confirming that prices are at arm’s length),
4. TP documentation (compliance documents to be submitted to the controlling authorities).

For example, to prove that the financial results of a transaction meet the arm's length principle, they are compared with market prices or profitability using TP methods or a combination thereof. A TP documentation (local file) is prepared, which contains the description of a procedure of analysis, rationale for the method chosen, and the results of its application. This documentation is then presented to tax authorities upon their request.

Breach of TP rules may lead to additional taxes and penalties for underpayment of taxes. Regulatory authorities (typically tax authorities) will have the right to adjust prices in controlled transactions and calculate taxable income if the parties had contracted based on the arm's length principle.

The additional tax amount is often substantial, and TP audits and related communication with tax authorities are time-consuming and complex due to numerous uncertainties and details in each specific case.

Therefore, it is strongly recommended to prepare price justifications/TP compliance documents in advance and ideally integrate TP planning and control into a company's business processes.

ADE Professional Solutions can provide the following support on various transfer pricing issues including:

• Conducting diagnostics of controlled transactions while considering TP method nuances.
• Providing methodological support and professional advice on the application of TP legislation;
• Preparing a TP documentation package for transactions, including justifications for the methodology and ensuring compliance of applied prices with market standards.
• Providing other professional tax consultations.

For over 10 years we have been provided advice on transfer pricing to such clients as Volvo, Ritter Sport, Harmtann, Doppelmayr, Hansgrohe, Miele, Sierentz, Deke, Hoya Holding, Farmamondo, Biocodex and many others. For more details, please visit www.ade-solutions.ae.