In the era of globalization, trade barrier’s does not exist between countries due to which Multinational companies(MNCs) having a presence in many countries freely trade across the globe. Due to this presence in many countries, MNC’s enjoys the inherent advantages of trading globally such as lower prices, reduced interest rates, and higher credit period.
On the other hand, entities not having global presence have to transact with independent parties at independent prices. Along with the above benefits of trading globally and having a presence in other countries, it also enjoys taxation benefits.
To curb or reduce the above benefit’s, a need to introduce regulation on transfer prices was felt.
MNC’s tries to distribute the profit’s, on the basis of contribution of trade member’s location in various countries and accordingly wants to pay taxes in various tax jurisdiction on that basis (say for example if MNC XYZ located in country USA also has a presence in India and Switzerland having contribution to revenue of 20% (USA), 30% (India) and 30% (Switzerland) respectively, therefore MNC XYZ will want to allocate the funds on this basis), while income tax authorities of various jurisdiction/Countries want to implement transfer pricing regulation’s in order to prevent the loss of revenue to each regime where these companies are incorporated. The net result of this conflict is that it results in chaos among tax authorities and MNC’s.
To resolve the above conflict, the principle which is introduced is OECD (Organization of Economic Cooperation and Development) model tax convention which serves as the basis for bilateral income tax treaties between various OECD implementing countries and between OECD implementing country and non-OECD implementing country.
As per the guidelines issued by above principle, “Transfer price is the price at which enterprise transfers or provides physical goods, intangible property or services to associated enterprises”.
Two enterprises are said to be associated enterprises if one participates directly or indirectly in the management, control on capital of other enterprises. Since international transfer pricing involves more than one tax jurisdiction, any adjustment to the transfer price in one jurisdiction requires a corresponding adjustment in the other jurisdiction. If the corresponding adjustment is not made in other jurisdiction, it may result in double taxation.
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