Transfer pricing PwC. 2 1.Background 2.Legislation 3.Transfer pricing methods 4.Transfer pricing...
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Transcript of Transfer pricing PwC. 2 1.Background 2.Legislation 3.Transfer pricing methods 4.Transfer pricing...
Transfer pricingTransfer pricing
2
1. Background
2. Legislation
3. Transfer pricing methods
4. Transfer pricing documentation
5. Main issues of transfer pricing
6. PwC services
Content
3
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
Arm’s length principle
4
Background (2)
Arm’s length principle:
The 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.
5
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).
6
Transfer Pricing Methods (2)
Type of Transaction Possible method
Manufacturing of goods CUP, C+, Profit split
Sale of goods CUP, Resale price, Profit split, TNM
Provision of services CUP, C+, TNM
Financing (loans, deposits, guarantees)
CUP, Profit split, TNM
Transfer of intangibles (technology, brand, know –how)
CUP, C+
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Transfer pricing documentation
• Information 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:
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Transfer pricing documentation
Based on international experience, we structure the documentation as follows:
1. Industry analysis: analyses of market trends, critical success factors;
2. Company analysis: business overview and financial results of the parties involved in the transaction, description of their business strategy;
3. Functional analysis: description of functions performed, risk assumed and assets engaged by related parties;
4. Description of intercompany transactions: characteristics of the subject of transaction, analysis of costs borne by related parties; determination of benefits derived from intercompany transactions;
5. Economic analysis: description of the pricing methodology, selection of transfer pricing method, benchmarking study, financial analysis.
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Main issues (1)
1. The accessibility of information;
2. Comparability of transactions;
3. Management services;
4. Transfers of intangibles.
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Main issues (2)
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 arm’s length range and justifying
the transfer prices.
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Main issues (3)
Comparability of transactions:Application of arm’s 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.
12
Main issues (4)
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 (“shareholder’s 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.
13
Main issues (5)
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 arm’s
length range.
JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
• CONTACT:CONTACT:• 0322-33857520322-3385752• 0312-23028700312-2302870• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTANKARACHI, PAKISTAN