Editing Transfer pricing (section)

{{Short description|Rules and methods for pricing transactions between enterprises under common ownership}}
{{See also|Transfer mispricing|Base erosion and profit shifting}}
{{Taxation}}

'''Transfer pricing''' refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length (the [[arm’s length principle|arm’s-length principle]]).<ref name=":2">{{Cite book|title=OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010, ''para. 0.18''|publisher=OECD Publishing|year=2010|isbn=978-92-64-09018-7|location=Paris|doi = 10.1787/tpg-2010-en|url=https://www.oecd-ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations_20769717 }}</ref><ref name=":1">{{Cite book|url=https://openknowledge.worldbank.org/handle/10986/25095|title=Transfer Pricing and Developing Economies : A Handbook for Policy Makers and Practitioners|last1=Cooper|first1=Joel|last2=Fox|first2=Randall|last3=Loeprick|first3=Jan|last4=Mohindra|first4=Komal|publisher=World Bank|year=2016|isbn=978-1-4648-0970-5|location=Washington, DC|pages=18–21}}</ref> The [[OECD]] and World Bank recommend intragroup pricing rules based on the arm’s-length principle, and 19 of the 20 members of the G20 have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice.<ref name=":3">World Bank pp. 35-51</ref><ref>OECD Guidelines 0.15</ref><ref name=":4">{{Cite web|url=http://www.oecd.org/ctp/transfer-pricing/transferpricingcountryprofiles.htm|title=Transfer Pricing Country Profiles - OECD|website=www.oecd.org|access-date=2017-02-27}}</ref> Countries with transfer pricing legislation generally follow the [http://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm ''OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations''] in most respects,<ref name=":4" /> although their rules can differ on some important details.<ref>{{Cite news|url=http://www.taxnotes.com/tax-notes-international/base-erosion-and-profit-shifting-beps/year-review-year-many-arms-length-standards/2017/01/02/18720661|title=The Year in Review: The Year of the Many Arm's-Length Standards|work=85 Tax Notes Int'l 25 (2017-01-02)|access-date=2017-02-27|publisher=Tax Analysts}}</ref>
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Where adopted, transfer pricing rules allow tax authorities to adjust prices for most cross-border intragroup transactions, including transfers of tangible or intangible property, services, and loans.<ref name=":1" /><ref>OECD Guidelines 0.11</ref> For example, a tax authority may increase a company’s taxable income by reducing the price of goods purchased from an affiliated foreign manufacturer<ref>OECD Guidelines 1.47-1.48</ref> or raising the royalty the company must charge its foreign subsidiaries for rights to use a proprietary technology or brand name.<ref>OECD Guidelines 6.1-6.39</ref> These adjustments are generally calculated using one or more of the [https://www.royaltyrange.com/home/blog/transfer-pricing-methods transfer pricing methods] specified in the OECD guidelines<ref>OECD Guidelines 2.9</ref> and are subject to judicial review or other dispute resolution mechanisms.<ref>OECD Guidelines 0.18, 4.1-4.168</ref>

Although transfer pricing is sometimes inaccurately presented by commentators as a tax avoidance practice or technique ([[transfer mispricing]]),<ref>{{Cite news|url=https://www.theguardian.com/commentisfree/2009/feb/11/taxavoidance-tax|title=Shifting profits across borders|last=Sikka|first=Prem|date=2009-02-12|work=The Guardian|access-date=2017-02-27|language=en-GB|issn=0261-3077}}</ref><ref>{{Cite magazine|url=https://www.rollingstone.com/politics/news/holiday-in-scambodia-20110720|title=Corporations to Get Tax Holiday? You're Kidding?|last=Taibbi|first=Matt|date=2011|magazine=Rolling Stone|access-date=2017-02-27}}</ref><ref>{{Cite web|url=http://americansfortaxfairness.org/new-report-taxpayer-supported-gilead-sciences-is-price-gouging-the-public-then-dodging-taxes-on-the-huge-profits/|title=Gilead Sciences: Price Gouger, Tax Dodger|last1=Rice|first1=William|last2=Clemente|first2=Frank|date=2016|publisher=Americans for Tax Fairness|location=Washington, DC|page=12}}</ref><ref>{{Cite news|url=https://www.economist.com/news/international/21601537-trade-weakest-link-fight-against-dirty-money-uncontained|title=Uncontained|newspaper=The Economist|access-date=2017-02-27|date=2014-05-03}}</ref><ref>{{Cite news|url=https://www.nytimes.com/2016/11/30/magazine/how-to-hide-400-million.html|title=How to Hide $400 Million|last=Confessore|first=Nicholas|date=2016-11-30|work=The New York Times|access-date=2017-02-27|issn=0362-4331}}</ref> the term refers to a set of substantive and administrative regulatory requirements imposed by governments on certain taxpayers.<ref>Falk, Daniel, “Transfer Pricing: Alternative Practical Strategies,” 19 Tax Mgmt. (BNA) Transfer Pricing Report, at 829 (Nov. 18, 2010)</ref> However, aggressive intragroup pricing – especially for debt and intangibles – has played a major role in corporate tax avoidance,<ref>{{Cite book|url=http://www.oecd.org/tax/measuring-and-monitoring-beps-action-11-2015-final-report-9789264241343-en.htm|title=Measuring and Monitoring BEPS, Action 11 - 2015 Final Report|year=2015|publisher=OECD Publishing|location=Paris|pages=151–156|isbn=978-92-64-24134-3}}</ref> and it was one of the issues identified when the OECD released its base erosion and profit shifting (BEPS) action plan in 2013.<ref>{{Cite book|url=http://www.oecd.org/tax/beps/action-plan-on-base-erosion-and-profit-shifting-9789264202719-en.htm|title=Action Plan on Base Erosion and Profit Shifting|date=2013|publisher=OECD Publishing|location=Paris|pages=20–21|isbn=978-92-64-20271-9}}</ref> The OECD’s 2015 final BEPS reports called for country-by-country reporting<ref>{{Cite web|url=http://www.oecd.org/tax/beps/guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.htm|title=Guidance on the Implementation of Country-by-Country Reporting: BEPS Action 13 - OECD|website=www.oecd.org|access-date=2017-02-27}}</ref> and stricter rules for transfers of risk and intangibles but recommended continued adherence to the arm’s-length principle.<ref>{{Cite web|url=http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/aligning-transfer-pricing-outcomes-with-value-creation-actions-8-10-2015-final-reports_9789264241244-en#.WLPVKlUrJhE|title=Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 - 2015 Final Reports {{!}} OECD READ edition|website=OECD iLibrary|language=en|access-date=2017-02-27}}</ref> These recommendations have been criticized by many taxpayers and professional service firms for departing from established principles<ref>{{Cite web|url=http://www.oecd.org/tax/beps/public-comments-received-on-the-conforming-amendments-to-chapter-ix-of-the-oecd-transfer-pricing-guidelines.htm|title=Public comments received on the conforming amendments to Chapter IX of the OECD Transfer Pricing Guidelines - OECD|website=www.oecd.org|access-date=2017-02-27}}</ref> and by some academics and advocacy groups for failing to make adequate changes.<ref>{{Cite web|url=https://bepsmonitoringgroup.wordpress.com/2015/10/|title=October {{!}} 2015 {{!}} The BEPS Monitoring Group|website=bepsmonitoringgroup.wordpress.com|date=5 October 2015 |language=en|access-date=2017-02-27}}</ref>

Transfer pricing should not be conflated with fraudulent trade mis-invoicing, which is a technique for concealing illicit transfers by reporting falsified prices on invoices submitted to customs officials.<ref>{{cite web|url=http://unctad.org/en/PublicationsLibrary/suc2016d2.pdf|title=UN Conference on Trade and Development: Trade Misinvoicing in Primary Commodities in Developing Countries (2016)|access-date=2016-11-23|archive-url=https://web.archive.org/web/20161027062226/http://unctad.org/en/PublicationsLibrary/suc2016d2.pdf|archive-date=2016-10-27|url-status=dead}}</ref> “Because they often both involve mispricing, many aggressive tax avoidance schemes by multinational corporations can easily be confused with trade misinvoicing. However, they should be regarded as separate policy problems with separate solutions,” according to [[Global Financial Integrity]], a non-profit research and advocacy group focused on countering illicit financial flows.<ref>{{cite web|url=http://www.gfintegrity.org/issue/trade-misinvoicing/|title=Trade Misinvoicing, Global Financial Integrity}}</ref>