Factors and Functions Affecting Transfer Pricing

Abstract

Transfer pricing is one of the hottest topics not only in international businesses but also for tax authorities, since the presence of price manipulation tendency of companies can affect the taxable profit base and at the same time the potential tax revenues of a specific country. The income shifting activities through price manipulations are limited by tax authorities and other international institutions and are regulated with the concept called arm’s length principle. This principle requires the intra company charges to be defined at the same conditions which might set up wile transacting with independent parties. Transfer pricing has been studied from different approaches: economic theory, linear programming, behavioral and accounting perspective. Besides of tax purposes it has been mentioned for: measuring of divisional performance, goal congruence, clarity of business processes and operations. Three types of Transfer pricing have been considered common for companies: marked based, cost based and negotiated Transfer Prices. Cost base Transfer Prices and C+ method are more preferable by service providers, especially by companies providing some specific services for which exact comparisons are difficult to find. According to the analysis of two main TP methods: traditional transactional methods and profit based methods it can be said that there is not a good or a bad Transfer pricing method, the selection depends on the characteristics of the company being analyzed and on the circumstances where it operates. The research approach used in the study is qualitative. A direct observation of one case company engaged in service industry was done. The objective of this research is to understand the importance of Transfer pricing issues and implementation processes in corporate level. Additionally, a one types of semi structured questionnaires were designed and distributed to the company representatives and Transfer pricing experts with the main goal to gain additional insights on how professionals are assessing Transfer pricing importance, and to compare the Transfer pricing issues between the professionals in the field and managers of the companies