Nowadays transfer pricing has become a hot topic for both multinational companies and tax authorities.

Since “the greatest crisis in the last 80 years” the most powerful economies from the world are the first to seek solutions to avoid “base erosion and profit shifting”. Through global exchange of information, new regulations and guidelines give the authorities freedom to “hunt down” intra-group transactions and by default the transfer prices.

Transfer pricing affects the amounts paid as corporate tax – the current economic conditions and the stringent need for resources at the state budget have determined the tax authorities to be more concerned about the topic of transfer pricing. This is also strengthened by the work of OECD regarding the base erosion and profit shifting (referred to as BEPS). Transfer pricing is not an exact science, therefore it is much easier for tax authorities to impose transfer pricing adjustment and recalculation of taxes to be paid from the budget. This is why companies which are part of a group must have strong arguments (organized in the transfer prices file) that intra-group transaction prices are arm’s length and not used for an “artificial” increase of spendings or “artificial” cut of incomes.

Transfer pricing affects cash flow, investment decisions and performance indicators – from a multinational company point of view, transfer pricing can influence cash flow streams (e.g. additional corporate tax imposed by the tax authorities will reduce the resources at hand), investment decisions (e.g. a jurisdiction with frequent changes of the transfer pricing legislation will bring uncertainty for multinational companies that could favor the decision to exit a certain country) and key performance indicators (e.g. additional corporate tax imposed by the tax authorities reduces the profitability a company could offer to its shareholders).

Transfer pricing affects custom value – for example, the customs authorities may not accept the transfer prices declared by a company for goods in customs transit and therefore will impose different price levels for custom valuation purposes. This raises issues as for the same property / goods two different values are allocated for tax purposes.

Transfer pricing can involve revenue or expense adjustments which trigger double taxation – since transactions between two related parties are not subject to the same market forces as transactions between independents, over or under-pricing can affect the allocation of tax bases among the various jurisdictions in which the group operates. By shifting profits from one jurisdiction to another, distorted transfer pricing can expose multinational companies to double taxation if two jurisdictions involved in a cross-border transaction claim taxing rights on the same profit.

Transfer pricing can help an organisation to identify opportunities for business optimisation – transfer pricing analysis involve a deep understanding of how the group’s business works, its key value drivers, and hence could indicate ways of improvement and / or optimization.

Transfer pricing is subject to legal requirements – more and more countries have included transfer pricing in their local legislation imposing fines, penalties, additional tax or other forms of constraint for not complying with the regulations.