Transfer Pricing Methods Research Articles

Coca-Cola Transfer Pricing Dispute: United States Case Analysis and Tax Policy Lessons for Indonesia

Decision of the Coca-Cola transfer pricing dispute in the United States Tax Court, which resulted in tax underpayment, can be used as a lesson for Indonesia. This research method is doctrinal, with a law, case, concept and interpretation approach. The data studied is secondary data in the form of laws, cases and relevant references, which are analyzed to obtain conclusions and recommendations. Research shows that the court considered using the Comparable Profits Method by tax authorities to evaluate the profitability of The Coca-Cola Company's supply points, given the difficulty of valuing intangible assets directly and the need for disproportionate profit adjustments. To avoid similar problems, companies in Indonesia must use transfer pricing methods that are reliable and appropriate to local conditions, as well as ensure good intellectual property management and documentation transparency, while tax authorities must monitor transactions between affiliated entities by international standards and the Arm's Length Principle.

Tax Crime Risk in Mining Sector Companies : An Examination of Transfer Pricing Analysis and Capital Intensity

This research investigates how capital intensity and transfer pricing may affect the likelihood of tax offenses in the mining industry. The report uses a sample of mining businesses listed from 2018 to 2022 on the Indonesian Stock Exchange (IDX) and using a quantitative research technique. The research examines the links between the dependent variable, which is represented by the cash effective tax rate (CETR), and the independent variables, transfer pricing (TP) and capital intensity (CAP), using multiple regression analysis and a legal approach. The corporations' transfer pricing methods and CETR vary significantly, according to descriptive data, indicating intricate dynamics in their tax management techniques. The results show a positive but statistically insignificant association between transfer price and CETR, which is consistent with contradictory findings from earlier research that supported and refuted the relevance of this relationship. The study's findings are important to policymakers because they imply that, despite transfer pricing's existence, its effect on tax evasion could not be as significant or clear-cut as previously thought. This realization necessitates a more sophisticated approach to mining industry compliance and regulatory frameworks, especially in environments like Indonesia. To get a deeper understanding of the changing dynamics of capital intensity and transfer pricing in influencing tax policies, future study should broaden its scope and include a wider range of factors over a longer time period.

Beyond State Aid: A Transfer Pricing Analysis for the Amazon Case

This study focuses on an analysis of the recent Amazon case from a purely transfer pricing perspective. The analysis is hence based on a four-step procedure, namely, accurate delineation of the transaction, its recognition, selection and application of the most appropriate transfer pricing method (MAM). As such, the perspective described in this text consciously does not address the state aid framework. This study is structured as follows: after the introduction in section 1., section 2. details the facts of the case, section 3. analyses the transfer pricing implications and section 4. sets forth conclusions.

TRANSFER PRICING AND ITS METHODS

TRANSFER PRICING AND ITS METHODS

Comparison of Transfer Pricing methods and their application in disputed tax cases in Indonesian courts

Transfer pricing is a trending topic of taxation in various worlds, not least in Indonesia. Directorate General of Taxation is very aggressive to supervise and monitor the practices of transfer pricing conducted by the taxpayer, because it is not just a case of fictitious tax refunds and tax realtor practices that erode the potential for state revenue from taxes, but the practice of tax evasion in the process transfer pricing is also considered a lot of harm to tax revenue. Transfer pricing practice is actually a common practice and commonly practiced by companies group companies. However, this can be a crucial issue when setting transfer prices is not in accordance with the principle of fairness and business prevalence (PKKU / arm's length principle) which regulated in the Indonesian transfer pricing regulations.. The taxpayer is given the freedom to use their own discretion in deciding the most appropriate method of measuring the transfer price. However, this leads to inconsistencies in the methods applied to arm's length transactions similar by entities from similar industries. Loopholes in this area are vulnerable to tax evasion practices since decades ago. This paper aims to compare the available methods for measurement transfer pricing.

Transfer pricing reforms in the context of BEPS: challenges remain

The presence of affiliated entities in different countries and the independence of tax systems make it easy to shift profits from jurisdictions with high corporate tax rates to jurisdictions with low rates. Transfer prices and the arm's length principle are used to prevent profit shifting. The article identifies the peculiarities of transfer pricing reform in the context of the BEPS plan, analyses changes to Ukrainian legislation and opportunities for its improvement.
 The article analyses the amendments to the Tax Code of Ukraine aimed at ensuring the implementation of the BEPS plan. The shortcomings of these amendments are outlined and amendments are proposed to improve the legislation. The author also examines the compliance with the BEPS guiding principle, which provides for the taxation of profits where profit-generating economic activities are carried out and where value is created. It is established that the amendments to the Tax Code of Ukraine do not ensure the implementation of this principle.
 In addition to the problems of practical implementation of the provisions of legislation, the article identifies conceptual shortcomings of the proposed improvements to the transfer pricing methods, which practically do not ensure the achievement of the set goals. An alternative method of pricing based on the market assessment of value added, which is determined by the sum of the firm’s factor income, wages and profits, is substantiated. Instead of the concept of “transfer price”, the concept of “fair market price” is introduced, which is determined by the sum of value added, depreciation and expenses, representing the added value of all previous stages of the production and/or distribution cycles. The proposed approach excludes the concepts of “affiliated entities”, “transfer prices” and “arm’s length principle”. The existence of a unified system of value added tax in the European Union allows for the unification of the tax system in terms of direct and indirect taxes as a result of the introduction of fair market prices.
 Amendments to the legislation have been proposed to allow for automatic solution of the following tasks.

Правовые основы выбора метода трансфертного ценообразования

The article discusses Russian transfer pricing methods, as well as the specifics of their application for assessing tax liabilities. The circumstances are considered, the analysis of which is necessary for the correct choice and application of transfer pricing methods.

Transfer Pricing Documentation Methods in Nigeria: A Critique of the Prime Plastichem Case Against International Best Practices

The quest to ensure that the tax planning activities of multinational enterprises operating in Nigeria do not erode the country's domestic tax base has led to the enactment and enforcement of the Transfer Pricing (TP) Regulations, 2018 in Nigeria. The TP Regulation provides for a comprehensive framework to ensure that the pricing of related party transactions is consistent with global best practices on TP. The enforcement of the TP Regulation in Nigeria was taken a step further in 2020 when the Tax Appeal Tribunal affirmed the imposition by the Federal Inland Revenue Service (FIRS) of liability of over one billion naira on Prime Plastichem Nigeria Limited for failing to apply consistent TP methods in the financial years 2013 and 2014. While this decision was hailed as Nigeria's first decision of the Tax Appeal Tribunal (TAT) dealing with transfer pricing, the decision has been criticised for failing to apply the global standards for TP documentation. This article seeks to critique the principles of TP documentation espoused in the Prime Plastichem case vis-à-vis international best practices on transfer pricing documentation.

ПОДАТКОВЕ РЕГУЛЮВАННЯ ТРАНСФЕРТНОГО ЦІНОУТВОРЕННЯ ТА ЙОГО ВПЛИВ НА СФЕРУ МІЖНАРОДНОГО БІЗНЕСУ

The article examines the theoretical, methodical and practical issues of transfer pricing in the company taxation system. The principles of choosing different methods of transfer pricing, the procedure and features of their application are given: the method of comparative uncontrolled price is based on external market prices; the "cost plus" method determines prices based on cost and profit; the resale price method is based on setting retail prices; the net profit method determines the profit relative to the volume of sales; the profit sharing method allocates the total profit between the parties in international transactions. It has been established that the comparative uncontrolled price method is the preferred method of determination for substantiating the terms of transactions between related parties. It was determined that the choice of transfer pricing method depends on the type of activity of companies, functional profile and other factors. It is proven that the justification of the conditions of transactions depends on the feasibility of the chosen method, which is chosen taking into account the specifics of the transaction, the presence of internal comparative transactions, commercial obligations of the parties to the transactions, and the functional profile of the company. Automated means of calculation for each method are proposed using the examples of individual non-resident legal entities.

Analisis Penerapan Praktik Harga Transfer Dalam Penghindaran Pajak

This study analyzes the application of tax avoidance in Indonesia through transfer pricing by taking various data in the form of financial statements and other relevant information from companies listed on the Indonesia Stock Exchange (IDX) in the 2018-2020 period. This study also uses the transfer pricing methods established by the OECD to calculate fair market prices as a reference to assess the fairness of transfer prices. The results showed that most of the companies listed on the IDX practiced transfer pricing in various ways, such as setting transfer prices that are higher or lower than fair market prices, or by conducting improper transactions. The transfer pricing practices carried out by these companies are influenced by several factors, such as leverage, profitability, tunneling incentive, bonus mechanism, and tax avoidance. The practices carried out by these companies have a significant impact on taxable profit, tax expense, and state tax revenue.

Safe Harbor Regimen in Transfer Pricing—An African Perspective

The transfer pricing methods established by the transfer pricing rules and practices of many countries (generally modelled after the OECD Transfer Pricing Guidelines) are not only complex to implement, but also fraught with challenges such as the lack of availability of comparables for benchmarking purposes, low accessibility of databases and the failed capacity of tax authorities to implement them. For tax authorities in African countries, these challenges are further amplified, for example, by lack of resources, especially human and capital, and a shortage of experience in applying transfer pricing rules. As a result of these challenges, achieving arm’s length prices for transactions between related entities has posed a significant burden and cost to both taxpayers and tax authorities. The OECD and the G20 initiated the Base Erosion and Profit Shifting (BEPS) project to ameliorate some of the challenges listed above and to address the erosion of tax bases and shifting of profit to low-tax jurisdictions—challenges ultimately tied to the limitations of the arm’s-length standard and application of transfer pricing methodologies. However, tax authorities in some jurisdictions already apply safe harbors and other simplified measures to mitigate the challenges of applying transfer pricing rules and practices. These measures reduce the need for taxpayers to prepare detailed transfer pricing documentation in justifying the arm’s-length price fixed for goods and services transferred among related entities. They also remove the need for tax authorities to audit the books of taxpayers where they act within approved margins. In some cases, they exempt taxpayers from applying transfer pricing rules to related-party transactions. Historically, the OECD discouraged the use of safe harbors by tax jurisdictions, claiming that they conflict with the arm’s length standard. In recent times, the OECD has changed its views on the use of safe harbors. The Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy recommends the use of safe harbors, including those in the GloBE rules, in determining marketing and distribution profits. Given the positive recommendation by the OECD on the use of safe harbors in recent times, this Article analyzes the adoption and application of safe harbor regimes by certain countries and discusses how they should be designed. It recommends the cautious adoption and application of safe harbor regimes by tax authorities in African countries to achieve increased revenue collection, tax efficiency, certainty, simplicity and convenience, and to circumvent the complicated comparability analysis.

METHODOLOGICAL TOOLS FOR MAKING MANAGEMENT DECISIONS ON TRANSFER PRICING

The article systematises methodological tools for making managerial decisions on transfer pricing. An analysis of domestic scientific works on the study of the list of methodological tools for determining transfer prices is carried out. It is found that transfer pricing researchers in the system of management accounting agree on a list of methods for determining transfer prices, including methods for determining transfer prices on the basis of market prices, on the basis of cost prices determined by marginal/standard/full costs or on a double basis, and on the basis of contract prices. Researchers of transfer pricing in the tax system are united in this approach and work with the methods (comparable uncontrolled price (as sales); resale price; "cost plus"; net profit; profit distribution) recommended by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and established by the Tax Code of Ukraine when checking the conformity of the terms of controlled transactions with the arm's length principle. Identify the conditions under which transfer pricing methods are used in domestic practice. The advantages and disadvantages of using certain transfer pricing methods are identified. To test and thoroughly analyse the transfer pricing methods, business operations of an agro-industrial enterprise are developed. The characteristics and limitations of the application of a particular transfer pricing method are identified. These transactions clearly illustrate the characteristics, advantages and disadvantages of using each transfer pricing method to verify the arm's length transfer price. The author demonstrates the need for adjustments in cases where the transfer price or profitability of a controlled transaction is not in line with the arm's length principle. The article emphasises the need for proportional adjustment of the tax base as a means of avoiding double taxation. Taking into account the systematisation of legal and regulatory provisions on transfer pricing, peculiarities, advantages and disadvantages of using certain methods, the author proposes a general scheme for making managerial decisions in the field of methodological management of transfer pricing operations.

Tax Optimization Through Transfer Pricing, Common & Manipulative Practices

When an associate enterprises transfer goods, intangible property then the prices at which the transfer takes place would be deemed as transfer price. The same has been defined as the Practice which is paid during a business transaction, which could be tangible property, goods or services between companies under which the price of the same can be controlled. The paper dwells into the ways through which multinational corporations use transfer pricing method to optimise their profits and at the same time use manipulative ways to evade tax.

Regulatory Issues and Recommendations on Transfer Pricing Tax Avoidance by Multinational Corporations

In recent years, with the continuous development of the global economy, multinational corporations allocate resources in various ways to reduce the overall tax burden of the group to achieve the business goal of profit maximization. The transfer pricing method is one of the most common international tax avoidances means used by multinational corporations. Although transfer pricing tax avoidance does not constitute an illegal act in form, in substance, it causes serious capital loss in the host country and infringes on the tax sovereignty of the host country. However, there are still many research gaps in international anti-avoidance regulation, so it is necessary to analyze and recommend the regulation of transfer pricing tax avoidance by multinational companies. This paper introduces a typical case of transfer pricing tax avoidance by Apple, introduces the principles and hazards of transfer pricing tax avoidance, and analyzes the current situation and shortcomings of transfer pricing tax avoidance regulation from three levels: multinational corporations, home countries, and host countries, and then propose suggestions to improve the regulation at the national, multinational corporation and social management levels.

CONCEPTUAL FRAMEWORK FOR DETERMINING THE TRANSFER PRICE OF THE LOANS

Associated enterprises integrated into business groups may use the capital resources of the group. When setting the remuneration for their use, they must ensure that prices between them are set according to the rules of the Organisation for Economic Co-operation and Development (OECD). The core document is the Transfer Pricing Guidance on Financial Transactions. Based on the results of a qualitative analysis (content and contextual analysis of the document), the aim of the article is to systematize the procedures used to determine the transfer price in financial transactions such as loans and borrowings where the parties are related parties (hereinafter referred to as "intra-group loans"). The decision-making process is illustrated by means of a flow chart that establishes the basic decision framework, or the individual steps leading to the selection of an appropriate transfer pricing method for intra-group loans.

Transfer pricing tools for adjusting the company’s profitability

The article examines the tools for adjusting the company’s profitability, which can be used in transfer pricing. In recent decades, countries have adopted various rules to combat tax evasion and tax avoidance. Among such rules, it is advisable to single out the rules of transfer pricing and the rules of controlled foreign companies. These efforts have gained significant attention considering the G20 and OECD BEPS initiative. The regulations on transfer pricing contain regulations on the implementation of the «arm's length» principle. The regulations define the methods that can be used to calculate transfer prices, define documentation requirements, include in your application various special requirements necessary to confirm the transfer prices used, and establish penalties for detection of incorrect pricing or inadequate documentation. According to the legal and regulatory norms, the profitability of the controlled operation can be within the range and outside the price range. Depending on the type of controlled transaction, the company may not take any action (if all regulations are met) or may have to make an independent price adjustment. To determine profitability, it is necessary to sample prices and financial indicators of similar comparable operations on the market. The article discusses methods of transfer pricing: comparative uncontrolled price, resale price, «cost plus», net profit, distributed profit. The reasons for the drop in profitability have been identified. A credit note is defined as an effective tool for adjusting profitability. This tool allows for quality control and minimizing possible credit risks. International practice indicates the effectiveness of using the credit note mechanism to adjust profitability in transfer pricing. It was established that in Ukraine the legal status of a credit note is not defined in the legislative framework. This situation creates problems when using this tool and does not contribute to its wider use.

Обліково-фінансові моделі прийняття стратегічних рішень у сфері ціноутворення

In an unstable external environment, an urgent task for enterprise managers is to determine a pricing strategy based on internal accounting and financial data to preserve the market position in the long term. The article aims to form a model for making strategic management decisions in the field of pricing at enterprises of the commercial sector of the economy based on accounting and analytical data on the costs of the enterprise. Analysis of accounting and financial models of strategic pricing at enterprises based on market, cost and mixed approaches was carried out. Accounting and financial models of price calculation based on accounting data on the costs of production and sale of products, as well as analysis of the life cycle of products, taking into account the expected rate of return, are given. It was determined that the basis of the market approach to price determination in the long term is the life cycle of products, which allows setting a competitive price for products taking into account the stages of market development and the position of products on it. The characteristic stages of the product life cycle are product development, market use, growth, maturity, and decline. The article analyzes the process of incurring costs at all stages of the product life cycle, which is the accounting and financial basis of strategic pricing at the enterprise and management in the long term. The cost approach involves the application of mark-up to various types of pricing for the base (variable costs, production cost of products, full costs of production and sale of products). It reduces managers' motivation for strategic cost management. Transfer pricing methods in the framework of the activities of a group of interrelated enterprises, which can be determined by cost and market approach, were also considered. The research results show that when making strategic pricing decisions, it is necessary to combine market-oriented pricing models and accounting-financial cost pricing models skillfully.

Risk Assessment Methods of Transfer Pricing

Transfer pricing is one on the greatest problem of the global system of taxation and therefore the efficient TP tax control is of special importance. As the risk-oriented approach allows to improve the TP tax control, tax administrations as well as businesses should apply and develop it for the timely risks identification. This assumption is based on the review of foreign and domestic scientific literature provided in this article. This study aims to analyze the significance of TP risk management system and its impact on the TP tax control and voluntary tax compliance as well as to develop proposals on the TP risks assessment methods, focusing on Ukrainian tax regulation as well as the OECD and the EU tax framework. The research methods include systematic and comparative analysis of scientific literature, deduction, induction, analysis, synthesis and systems approach. To fulfill the objective of this study the analyses of legislative regulation of the TP control at both the international and the country level is provided, focusing on the stage of the monitoring of the controlled transactions. For the enhancement monitoring stage of the TP control the algorithm for the risk identification and assessment for the monitoring of controlled transaction (CT) is suggested. The study also provides for the methodology on comparison of the profitability of taxpayers with the average in the industry and methodology for building the TP risks matrix. The study results revealed the significance of the TP risks management processes standardization that allows its automatization and could contribute to the TP tax control strengthening as well as an TP compliance improvement. The prospects for future research could be focused on development of an algorithm for comparing the prices of CT with the quoted prices for raw materials.

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.

Tax differences and international location strategies

This paper examines the influence of tax rate differences and international transfer pricing regulations on the profit-maximizing location strategies of a multinational firm (MNF). We show how a MNF that sells its products in multiple markets and manufactures multiple inputs used for its own production can optimize its tax strategy by jointly selecting the location of input production and the transfer pricing method. We find that a production technology with multiple complementary inputs results in a close connection between national and international transfer prices. Selecting different location choices enables the MNF to base international transfer prices on different arm’s length standards. The optimal location strategy and transfer pricing approach balances the gains from profit-shifting to the low-tax country with the losses that occur due to distorted quantity choices. The MNF’s trade-off between the gains or losses can be moderated by adjusting domestic transfer prices for transactions between the divisions in the high-tax country.