OECD - Transfer Pricing

• Transfer prices serve to determine the income of both parties involved in the crossborder transaction. The transfer price therefore tends to shape the tax base of the countries involved in crossborder transactions.


• Consequently, cross border tax situations involve issues related to jurisdiction, allocation of income and valuation.
  
  
  1. jurisdiction
     The key jurisdictional issues are
     
     
     1. which government should tax the income of the group entities engaged in the transaction, and
     2. what happens if both governments claim the right to the same income.
     3. which country should give tax relief, if both governments are claiming tax from same income, to prevent double taxation of the relevant MNE entities’ income?
     An added dimension to the jurisdictional issue is motivation for transfer pricing manipulation as some MNEs engage in practices that seek to reduce their overall tax bills.
     
     This may involve profit shifting through non-arms-length transfer pricing in order to reduce the aggregate tax burden of a multinational group. For example by
     
     
     • utilising tax losses of an associate that has a time limit or about to expire.
     • booking higher expenses (over charging), say to a subsidiary of the MNE where there is a significant difference between the corporate tax rate of 20% for the parent and a higher 30% for the subsidiary.