Transfer pricingPwC

ContentBackgroundLegislationTransfer pricing methodsTransfer pricing documentationMain issues of transfer pricingPwC services PwC

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

Arms length principle

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Background (2)Arms length principle:PwCThe 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.

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).PwC

Transfer Pricing Methods (2)PwC

Transfer pricing documentationPwCInformation 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:

Transfer pricing documentationPwCBased on international experience, we structure the documentation as follows:

Industry analysis: analyses of market trends, critical success factors;Company analysis: business overview and financial results of the parties involved in the transaction, description of their business strategy;Functional analysis: description of functions performed, risk assumed and assets engaged by related parties;Description of intercompany transactions: characteristics of the subject of transaction, analysis of costs borne by related parties; determination of benefits derived from intercompany transactions; Economic analysis: description of the pricing methodology, selection of transfer pricing method, benchmarking study, financial analysis.

Main issues (1)PwC

The accessibility of information;Comparability of transactions;Management services;Transfers of intangibles.

Main issues (2)PwC

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 arms length range and justifying the transfer prices.

Main issues (3)PwC

Comparability of transactions:Application of arms 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.

Main issues (4)PwC

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 (shareholders 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.

Main issues (5)PwC

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 arms length range.

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