affiliated group and the tax that is to be paid on the profits of each legal segment of
the business.
Transfer pricing is, at the outset, a business decision and a tax decision. Income
tax payments are a significant cost for most multinational businesses. and transac-
tions between affiliated entities are an important part of this income tax exposure.
Global transfer pricing is an analytical approach that enables a business to control its
income tax cost on a worldwide basis. This global transfer pricing approach focuses
only on transactions with related parties, so that relationships with independent enti-
ties are ignored. Other relationships, such as business partnerships between unrelated
entities, remain a threshold inquiry for the tax collectors.
(d) Foreign Country Participation in Transfer Pricing. More than 30 countries have
somewhat standard approaches toward transfer pricing, typically through the Orga-
nization for Economic Cooperation and Development (OECD). Such countries in-
clude the following:
29 • 4 TRANSFER PRICING FOR INTERCOMPANY TRANSACTIONSArgentina
Australia
Belgium
Brazil
Canada
Chile
China
Czech Republic
Denmark
Finland
FranceGermany
India
Indonesia
Italy
Japan
Kazakhstan
Korea
Malaysia
Mexico
Netherlands
New ZealandPoland
Russia
Sweden
Singapore
Switzerland
South Africa
Spain
United Kingdom
United States
Venezuela(e) Basics of the Transfer Pricing Inquiry. Global transfer pricing is complex and re-
quires significant analytical inputs. A company seeking to use global transfer pricing
should be able to answer the first ten inquiries, using this information as a starting
point for each country in which the company does significant business:
- What transfer pricing methods are acceptable in the country?
- What priority is there among transfer pricing methods?
- What penalties can the country impose on your company?
- When can you reduce the penalty that could otherwise be imposed?
- What type of information must you provide to the tax collector?
- Can you set up a pricing agreement with the tax collector in advance?
- What adjustments and set-offs are required after a pricing adjustment?
- When can you use a cost sharing agreement with your affiliates?
- What is the effective tax rate in your configuration in that country?
- What is the effective withholding rate for international payments?
Transfer pricing issues impact both the businesses that may have to pay the taxes
and the tax collectors that expect to collect the taxes. Quite fortuitously, and by de-
sign, transfer pricing rules across international borders are much more similar than
they are different. These differences, however, lead to substantial tax consequences.
Most differences typically lead to double taxation but these differences occasionally
lead to tax-saving opportunities.