Intra-group Transactions Research Articles

The Regulations of Financial Conglomerates in Five Asia Countries and Australia: A Policy Comparative Study

Financial conglomerates are considered to have a significant role in a country’s economy. A well-developed financial conglomerate will bring economy’s positive growth. However, when one collapses, systemic risk cannot be avoided to the financial system. The study conducts a comparative analysis of financial conglomerates/financial holding companies policies in six countries: Indonesia, South Korea, Taiwan, Malaysia, Singapore, and Australia. Furthermore, the research examines the literature review method of financial conglomerates criteria, structure, synergy, intragroup transactions, and data protection. In general, the requirements of financial conglomerates within research sample countries align with the Joint Forum. Indonesia is still developing the financial conglomerate’s minimum assets and members. Singapore is more concerned with a portion of assets, capital, liabilities, or income, while Taiwan regulates the total assets and paid-in capital. Malaysia regulates strictly with specific minimum ownership, while Australia focuses more on transaction materiality. The synergy among members of financial conglomerates may improve efficiency—however, the intragroup transactions raise systemic risk. Consumer data protection should be considered when financial conglomerates conduct cross-selling. From this study, policymakers should enhance their policies so that financial conglomerates take more advantage of generating the country’s economy while managing challenges to the financial system’s stability.

Justifications for minority co-owned groups and their corporate law implications

Abstract Corporate groups with listed subsidiaries are common around the world, despite the risks they pose to minority shareholders. Shaping a firm as a web of formally independent, minority-co-owned legal entities facilitates controllers’ diversion of corporate wealth (tunnelling) via intragroup transactions and other nontransactional techniques. This Article problematizes the conventional view of groups as tunnelling-facilitating infrastructures by arguing that organizing as a group with listed subsidiaries (a minority co-owned group) may create value for all shareholders. Organizing as a minority co-owned group may increase transparency, improve performance thanks to the possibility of using stock options for subsidiaries’ managers, allow for the circumvention of inefficient restrictions to dual-class shares, facilitate cross-border acquisitions, and be a second-best solution in the presence of path dependence issues preventing firms from moving from concentrated to dispersed ownership. If these are the economic rationales for having minority co-owned groups, how should the latter be regulated? In continental Europe special corporate law rules centred on a relaxation of directors’ fiduciary duties within minority co-owned groups, with a view to facilitating intragroup transactions, are increasingly popular among academics and policymakers. These rules, in turn, are bound to blur the separation between the minority co-owned listed entity as an independently managed firm and other members of the corporate group. However, because the rationales for minority co-owned groups presuppose the opposite, namely a clear and transparent separation between the minority co-owned listed entity and the group, our conclusion is that stringent self-dealing rules (or at least no less stringent rules than those established for conflicted transactions other than intragroup transactions) are required for minority co-owned groups to create value for all shareholders rather than merely facilitate tunnelling.

Investigating the international corporate tax revenue efficiency under the digital economy: multiple case study of MNES operating in India

PurposeThe purpose of this paper is to validate the theoretical finding that digital MNEs avoid physical presence norms of permanent establishment and royalty characterization rules for business and royalty taxation, respectively, to escape tax incidence in the market economy, using information, communication and technology features and transfer pricing (TP) manipulations.Design/methodology/approachMultiple case studies of MNEs from technology sector, based on judicial decisions in 141 cases, over taxability of profits earned from Indian economic activities. Additional in-depth case study of the Uber Group to study the tax avoidance structures under platform economy, by routing of Indian profits through The Netherlands, a tax haven.FindingsThe study finds a significant number of digital MNEs earning profits from India and avoiding tax by defying physical presence and royalty characterization. In majority of the cases, demand-side business activities are discharged through incorporating and remunerating affiliates at cost plus low markup, thus avoiding tax incidence, using TP manipulations under the arm’s length principle applied by governments for benchmarking the intragroup transactions of the MNEs.Research limitations/implicationsThe research findings validate the view that digital features promote tax avoidance in the market economy.Originality/valueThe originality of the study lies in the validation of profit shifting through digital features from the developing market economy and portending that digital MNEs defy physical presence to avoid business taxation through TP manipulations.

The Impact of Transfer Pricing on the Company’s Image. Implications in Audit Work

In an economy strongly marked by globalisation, transfer pricing is at the top of the agenda of taxpayers, tax authorities and regulatory bodies, with its influence manifested primarily in the fiscal area, respectively in the correct determination and proper allocation of the corporate tax base between different jurisdictions or between companies operating within the same jurisdiction. However, transfer pricing transcends the fiscal problematic and significantly influences other aspects of a company's life, one of which is the image reflected in the annual financial statements, including cash flows or financial performance indicators, and through their analysis, the investment decisions of potential users of accounting information. Transfer pricing is, therefore, also a reference point in the audit work carried out at the level of companies part of national or multinational groups and involved in significant intra-group transactions, as compliance or noncompliance with the arm’s length principle directly influences the way in which different elements of income, expenses, results, assets, equity or liabilities are reflected or not in accordance with the true and fair view principle and thus, ultimately, the audit opinion. National and international auditing standards provide recommendations and guidance on how to deal with transfer pricing issues as part of audit engagements, reflecting a continuing concern by professional bodies to develop best practices in this area.

Manipulation of Transfer Pricing Rules by Multinational Enterprises in Developing Countries: The Challenges and Solutions

Domestic revenue mobilisation has become a topical issue in developing countries, and their capacity to regulate multinational enterprises (MNE) transactions to minimise Base Erosion and Profit Shifting (BEPS) remains a formidable task. Faced with legislative deficiencies, implementation incapacities, and being at the nascent stages of adopting transfer pricing (TP) regulation, developing countries have remained at the mercy of MNEs’ BEPS practices. The complexity and intricacies of intragroup transactions have an impact on profit allocation, thus affecting the distribution of taxing rights across countries where these MNEs operate. This study explores the regulatory policies toward international transfer pricing in the context of developing nations and the associated challenges. The paper proffers possible solutions to improve TP regulation and implementation. Specifically, the paper centres its attention on Zimbabwe, one of the developing nations that have implemented transfer pricing legislation in recent years. Mitigating the impact of BEPS through efforts, such as regulating and managing TP would avail potential substantial finance to shift developing countries from aid dependence to self-sustenance, yet these efforts face a lot of hurdles. Research that contributes to knowledge development in the area, evaluates the hurdles faced and contributes to policy and implementation improvements becomes vital. This study found that Zimbabwe is faced with challenges such as lack of legislative clarity, lack of comparability data, shortage of resources, lack of capacity and dysfunctional double taxation agreements in dealing with transfer pricing. The study recommends Zimbabwe should improve legislation, create TP databases, improve revenue authorities’ capacity, and increase stakeholder awareness of TP.

Exploring Determinants of Transfer Pricing Practices Among Romanian Publicly Traded Companies

Abstract This paper explores the effect of determinants shaping the landscape of transfer pricing practices within intra-group transactions among publicly traded companies in Romania over the period 2022. The research hypothesis focuses on identifying the variables that have a significant impact on transfer pricing in the Romanian business environment. Data collection was conducted manually from various sources, including explanatory notes from annual reports and databases such as Thomson Reuters and Bloomberg. The results reveal that the size of companies, sales, capitalization, foreign ownership, sales growth, and operational profit collectively contribute to the influence on transfer pricing practices. However, individual analysis shows that only sales significantly affect the transfer pricing practice.

The role of financial affiliates in tax avoidance by business groups: Evidence from Korea

AbstractThis study examines whether financial affiliates within a nonfinancial business group perform certain roles and functions in tax avoidance by other nonfinancial affiliates or the group as a whole. Financial institutions have tax‐planning expertise and knowledge and thus may assist other affiliates of the same group in avoiding taxes. In addition, regulatory loopholes leave scope for tax avoidance involving financial affiliates. Using 10,659 firm‐year observations from 866 nonfinancial listed firms affiliated with business groups in Korea over the period 2001–2019, I find that firms belonging to nonfinancial groups with financial affiliates exhibit higher levels of tax avoidance than those belonging to nonfinancial groups without financial affiliates. The same result is observed at the group‐level tax avoidance as well as the firm‐level tax avoidance. In addition, I provide evidence that KFTC‐designated business groups subject to tighter regulation engage more in tax avoidance by utilizing financial affiliates in the blind spots of regulation and oversight, and that related‐party transactions (i.e., intragroup transactions) are used as avenues for financial affiliates to help other affiliates in tax avoidance. This study is one of the first empirical studies to shed light on the role of financial affiliates of nonfinancial groups in tax planning.

Tax Dispute in a Digital Economy: The Legal Implication in Nigeria

The study examines the tax disputes in a digital economy with a precise focused on the legal implications in Nigeria. The study explored some of the tax jurisdiction law in the digital economy. This digital economy encompasses various revenue streams and business models, such as e-commerce, digital services, online advertising, and software licensing. The study also identify transfer pricing issues arising from tax authorities in questioning the pricing of intra-group transactions involving intangible assets such as intellectual property rights or digital content. The significance of Permanent Establishment (PE) in determining a business's tax liabilities in a foreign jurisdiction were also discussed. The disputes that are commonly arise when taxpayers fail to fulfill their reporting obligations and the legal implications. However, the study highlighted the development of tax laws and regulations, leading to divergent views between taxpayers and tax authorities on the application and interpretation of tax laws in the digital context. Thus, the study employed a phenomenological research method, specifically a systematic review approach to examine the pertinent literature. Based on this study, it was concluded that tax authorities in Nigeria need to possess a deep understanding of the legal ramifications associated with tax disputes in the digital economy. To successfully navigate such disputes and contribute to an acquiescent and transparent digital economy, the study recommends that Nigerian tax collectors should closely collaborate with legal professionals, continuously update their knowledge of tax regulations, use technology solutions, and offer proactive advice to their clients. They should effectively handle tax disputes and play a vital role in ensuring a transparent and amenable digital economy. Keyword: Tax Disputes, Digital Economy, Legal Implication and Accountants

DEVELOPMENT OF THE ENTERPRISE MANAGEMENT SYSTEM THROUGH THE IMPLEMENTATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

Explain the concept of consolidated financial statements, parent company, subsidiary company according to international and national standards. To study the composition of consolidated reports, the consolidation process, the principles of consolidation. Study the types of controlled entities, taking into account the proportion of voting rights held by the investor and the standards that govern them. Define the concept of control according to international standards and identify the factors that influence the determination of whether the investor controls the investee. The purpose of the paper is to develop methodological and practical recommendations for preparing group management reporting in accordance with international standards. Consolidated reporting should be prepared to identify the results of the analysis of the state and activities of the holding, there is a need to transform consolidated reporting in accordance with IFRS for entering the international market and attracting foreign investment. Methodology. The research is based on the application of general scientific techniques and methods. The methods of detailing, analysis and synthesis, deductive and inductive approach have been used to clarify the concept of "IFRS". The methods of selective observation and historical argumentation of the researched problems are applied – to generalise the unsolved problems of IFRS. Results. Consolidated financial statements undoubtedly contain important information for making financial and management decisions. Intra-group transactions can give an unrealistic picture of the activities of a group of companies, their sales, calculations, stocks and financial results; therefore, consolidated reporting gives a more objective picture of the operations and financial status of a single economic unit and does not replace the individual financial reports of group companies, since transactions between group members are not taken into account during consolidation. Practical implications. The concepts of consolidated financial statements, parent company, subsidiary company according to international and national standards are revealed. The composition of the forms of consolidated reporting, the consolidation procedure, the principles of consolidation are considered. The types of controlled entities, taking into account the investor's share of voting rights, and the standards governing them are presented. The concept of control in accordance with international standards is defined and the factors influencing the determination of whether the investor controls the investee are presented. Value/originality. Methodological and practical recommendations have been developed for the preparation of group management reporting in accordance with international standards.

Transfer Pricing in Brazil: Practical Aspects in the Adaptation of the Arm’s Length Standard

Brazilian taxpayers need to comply with new OECD-based transfer pricing rules as of financial years starting on or after 1 January 2024. They are also allowed to apply the new rules for financial years starting on or after 1 January 2023, if they choose for “early adoption” later this calendar year. This article outlines the practical impact of the new rules for Brazilian taxpayers, based on its underlying concepts and a case study including intra-group transactions that Brazilian taxpayers are commonly engaged in. In addition, the authors aim to illustrate some key considerations, opportunities, and risks of the upcoming decision whether to adopt early.

Boundaries of the firm and real earnings management

Despite harmful effects, Real Earnings Management (REM) is increasingly becoming a more popular method of earnings management than Accruals based Earnings Management (AEM) (Cohen et al., 2008; Commerford et al., 2018). We argue that when a firm’s organizational structure has extended boundaries with other firms, the benefits due to REM can outweigh the costs. We use family business groups, that extend firm boundaries with other affiliated firms, for testing our conjecture. Using a large dataset of 11,417 firm-year observations of Indian firms, we show that REM is significantly higher in business group affiliated firms compared to standalone firms. Further, intra-group transactions, in the form of purchases, sales, and cash flows from operating activities, contribute to higher REM activities. More importantly, when group affiliated firms engage in intragroup transactions and report higher REM, mainly in the form of abnormal production, they experience an increase in their future profitability and a decrease in their cost of equity.

Intra-Group Transactions from VAT Point of View – The Pricing

Intra-group transactions performed by members of multinational enterprise groups can have in several particular implications in the field of taxation. In this article, the author analyses the impact of the potential VAT consequences of pricing in intra-group transactions, which covers the VAT treatment of transfer pricing adjustments and the application of open market value.

The Case Against a Special Regime for Intragroup Transactions

Corporate groups with minority shareholders in one or more subsidiaries are common around the world, despite the risks such arrangements pose to those shareholders. Shaping a firm as a web of formally independent, minority-co-owned legal entities facilitates controllers’ diversion of corporate wealth (tunnelling) via intragroup transactions and other non-transactional techniques. While many jurisdictions leave the regulation of intragroup transactions to ordinary remedies against self-dealing, others (mostly in Europe) establish a special regime centred on a relaxation of directors’ fiduciary duties. Under this special regime, subsidiary directors are not liable if they make disadvantageous decisions that are beneficial to other entities within their group, provided that proper compensation is granted (or, according to some proposals, may reasonably be expected to be granted) to the subsidiary. This article conducts a qualitative cost-benefit analysis of the special regime, focusing on the European Model Companies Act’s rules on intragroup transactions. We concede that such rules have the advantage of reducing contracting costs and enhancing managerial flexibility within the corporate group, relative to systems governed by ordinary corporate law rules against unfair self-dealing. However, we also show that those benefits can be expected to be very limited. Furthermore, we show that this special regime substantially reduces minority shareholder protection against tunnelling, by making it much harder for minority shareholders to recover damages from controllers’ unfair self-dealing. Overall, our analysis suggests that, for corporate groups with minority shareholders at the subsidiary level, this regime should be implemented as an opt-in arrangement, if at all. Even in that form, it should be adopted together with adequate protections for shareholders dissenting from the midstream resolution to opt into the regime.

Green by Affiliation? Ownership Identity and Environmental Management System Adoption in Chinese Business Groups

How does owner identity affect environmental management system (EMS) adoption by business group affiliates? While current research on EMS adoption is mostly focused on stand-alone Western firms, a marked uptake of adoption has unfolded in Eastern countries such as China, where business group affiliates are the dominant organizational form. This stark contrast between corporate interest and research attention has left a clear lacuna in our understanding of how systems that can reduce environmental impact diffuse across industrial settings. We argue that state, family, and foreign owners of affiliated firms show distinct propensities to adopt an EMS, owing to differences in legitimacy needs, ownership competencies, and group-level preferences to engage in systematic environmental practices. Logistic regressions based on data from listed Chinese business group affiliates between 2008 and 2019 show that state and family ownership negatively influence the likelihood of EMS adoption, whereas foreign control has a positive effect. More intragroup transactions exacerbate the low adoption propensity of family-owned firms. Our study contributes to the literatures on business groups and corporate environmentalism.

Intragroup Transactions, Corporate Governance, and Corporate Philanthropy in Pakistani Business Groups

Intragroup Transactions, Corporate Governance, and Corporate Philanthropy in Pakistani Business Groups

Transfer pricing policy concept model for MNEs in relation to strategic management

Purpose: Transactions carried out in MNEs among parent companies and subsidiaries affect the achievement of the strategic and operational objectives of MNEs, their financial results, taxes paid and intra-group relations. The aim of the paper is to justify the need to extend the areas of strategic management in MNEs to include the area of tax, in particular related to the valuation of transactions between entities within a group, and the need to meet the obligations related to transfer pricing. The practical aim of the article is to propose an original transfer pricing policy model for MNEs, which may be adopted to increase the transparency of settlements and have a positive impact on operational and strategic effectiveness within groups. Design/methodology/approach: The paper is based on qualitative research. Content analysis of legal provisions and prior literature was used for the collection of relevant data for building a transfer pricing policy model. Findings: A comprehensive and consistently implemented transfer pricing policy may help in optimizing the tax structure of MNEs, as well as minimizing the risk associated with changes in tax provisions. As an instrument influencing operational relations and performance management in MNEs, it can be a significant element of the strategic management of groups. Practical implications: The research impact upon MNEs is the possibility to apply and adopt the transfer pricing policy model proposed in the paper in order to support performance management within a group. Social implications: The way multinational entities conduct their business is often perceived negatively by society due to issues of tax evasion. The implementation of a comprehensive transfer pricing policy promotes corporate tax transparency and increases employee tax awareness. Originality/value: The originality of the article stems from a coherent combination of various aspects relating to intra-group transactions into one model, which on the one hand supports the management of subsidiaries, and on the other facilitates compliance with Polish and international legal provisions. The proposed model may be subject to further development. Keywords: corporate taxation, subsidiaries, accounting, compliance, tax avoidance. Category of the paper: research paper.

THE TRANSFER PRICING FILE AND TAX CONTROVERSIES - AN EMPIRICAL STUDY

Transfer pricing is a real challenge for both tax regulators and multinationals who use this procedure, in most cases to erode the tax base. The purpose of this paper is to analyse the tax practices and regulations of countries applying OECD transfer pricing regulations. To this end, the profiles of 69 countries on the application of transfer pricing regulations and methods of assessing the transfer pricing file have been analysed. The research results indicate that countries with developed economies and high tax burdens have more rigid transfer pricing tax regulations, the aim of which is to prevent tax evasion through transfer pricing. At the same time, emerging economies with a more lenient tax system do not pay particular attention to transfer pricing, but provide clear regulations on the methods of assessing the transfer pricing case. At the other end of the spectrum there are weakly developed countries, which apply OECD transfer pricing regulations but are flawed in their practical application. The results of the research are of real use both to national and international regulators and to multinationals applying transfer pricing in intra-group transactions.

New Transfer Pricing Guidance in the Netherlands on Intra-Group Pricing of Financial Transactions – An Analysis of Potential Implications

The authors analyse the impact of the new 2022 Dutch transfer pricing decree on financial transactions and specifically on the pricing of intra-group loans and financial services companies (so-called financial intermediaries). Particular attention is paid to the role of control over financial risks and the concept of financial capacity. The analysis reveals several attention points that can have an immediate and significant impact on taxpayers involved in such financial intra-group transactions.

Tworzenie i funkcjonowanie grup VAT w Polsce po 1 stycznia 2023 r.

The subject of the study are issues of creation and of functioning VAT group, including the issue of taxation of activities performed within this group. The possibility of joint settlement of tax on goods and services currently functions in many European Union countries, but in the Polish legal system it is a completely new institution and the regulations implementing it will come into force on January 1, 2023. Due to the fact that VAT is a harmonized tax, an analysis was also made about the regulation of VAT groups in terms of EU law with reference to the case law of the Court of Justice of the European Union. Creation of VAT groups by Polish taxpayers is optional and it is necessary that there are economic, organizational and financial links between the taxpayers included in the VAT group during the creation and operation of the group. The supply of goods and the provision of services by a member of the VAT group to another member of the same group is not subject to taxation, which results in complete neutrality of intra-group transactions. In transactions with external entities, the VAT group acts as a single taxpayer, and all its members settle accounts jointly.

West African Economic and Monetary Union

The limited development of markets in the region represents a key risk factor for financial stability. 1 Since the previous Financial Sector Assessment Program (FSAP) in 2008, the bank deposit base has increased from 18 percent to 30 percent of gross domestic product (GDP) and the buoyancy of the government securities market has benefited from the interruption of public deficit financing by the Central Bank of West African States (BCEAO). Nevertheless, a significant portion of bank funding cannot be considered stable, due to the concentration of deposits held by large corporations. Apart from reserves held with the BCEAO, banks have little in the way of liquid assets, although the secondary market for government securities is beginning to grow for some issuers. Insufficient secondary market liquidity and the prevalence of unsecured intragroup transactions (60 percent of the total) in the interbank market exacerbate the risk and extent of potential losses for banks in the event of liquidity distress.