Transfer pricingTransfer pricing

2

1. Background

2. Legislation

3. Transfer pricing methods

4. Transfer pricing documentation

5. Main issues of transfer pricing

6. PwC services

Content

3

Background (1)

Globalization

Increased cross border intercompany transactions

Manipulation of transfer prices in order to minimize the tax burden

Tax authorities forced to regulate transfer prices

Arm’s length principle

4

Background (2)

Arm’s length principle:

The prices in intercompany transactions should not

differ from the prices determined by unrelated parties

and

the profit or income accrued from intercompany

transactions should not differ from the profit or income

earned from transactions between unrelated parties.

5

Transfer Pricing Methods (1)

When choosing the best transfer pricing method, the available methods should be considered in the following order:

1. Comparable Uncontrolled Price (CUP);

2. Resale Price or Cost Plus (C+);

3. Profit Split or Transactional Net Margin (TNM).

6

Transfer Pricing Methods (2)

Type of Transaction Possible method

Manufacturing of goods CUP, C+, Profit split

Sale of goods CUP, Resale price, Profit split, TNM

Provision of services CUP, C+, TNM

Financing (loans, deposits, guarantees)

CUP, Profit split, TNM

Transfer of intangibles (technology, brand, know –how)

CUP, C+

7

Transfer pricing documentation

• Information about the parties involved in the transaction;• Information about intercompany transactions:

– Characteristics of the subject of transaction;– Functional analysis;– Terms and conditions of the transaction;– Economic circumstances of the transaction;– Business strategy.

• Information about transfer pricing method used;• Other information that reveals the important circumstances of transfer pricing.

The compulsory elements of transfer pricing documentation:

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Transfer pricing documentation

Based on international experience, we structure the documentation as follows:

1. Industry analysis: analyses of market trends, critical success factors;

2. Company analysis: business overview and financial results of the parties involved in the transaction, description of their business strategy;

3. Functional analysis: description of functions performed, risk assumed and assets engaged by related parties;

4. Description of intercompany transactions: characteristics of the subject of transaction, analysis of costs borne by related parties; determination of benefits derived from intercompany transactions;

5. Economic analysis: description of the pricing methodology, selection of transfer pricing method, benchmarking study, financial analysis.

9

Main issues (1)

1. The accessibility of information;

2. Comparability of transactions;

3. Management services;

4. Transfers of intangibles.

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Main issues (2)

Accessibility of information:

• Public available information is limited;

• Some information may be not reliable;

• The access to the commercial data bases is fairly expensive;

• Third parties often are not willing to reveal the information.

Complications determining the arm’s length range and justifying

the transfer prices.

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Main issues (3)

Comparability of transactions:Application of arm’s length principle involves a comparison of the terms

and conditions in a controlled transaction between related parties with the

terms and conditions in transactions between independent parties.

The degree of comparability depends on various factors: characteristics of

goods, property or services, contractual terms, economical circumstances,

functions performed, risk assumed, business strategies, etc.

Difficulties to find highly comparable transactions.

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Main issues (4)

Management services:• Service agreements lack information on service specification,

costs arising in the parent company and calculation of the

charge (fee) for service rendered.

• The costs of parent company (“shareholder’s costs”) are

transferred to its subsidiaries.

• Duplication of services.

• Mark-up is too high or not added at all.

The fee for management services is not justified.

13

Main issues (5)

Transfers of intangibles:

• There is generally not an active market for intangibles.

• Transactions involving intangibles often include other assets

and liabilities, disguising the value of the subject of intangible.

• Transaction prices are often not disclosed.

Limited comparability and complications determining the arm’s

length range.

JOIN KHALID AZIZ

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