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The Significance of Transfer Pricing in Today’s Economy

The Significance of Transfer Pricing in Today’s Economy. Joel Lachlan Cooper International Tax Specialist jcooper3@ifc.org. What is Transfer Pricing?.

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The Significance of Transfer Pricing in Today’s Economy

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  1. The Significance of Transfer Pricing in Today’s Economy Joel Lachlan Cooper International Tax Specialist jcooper3@ifc.org

  2. What is Transfer Pricing? The Significance of Transfer Pricing in Today’s Economy • ”The amount charged by one segment of an organization for a product or service that it supplies to another segment of the same organization” (Horngren and Sundem, 1993) • The term is typically used to describe ‘transfer pricing’ for direct taxation purposes: • Associated parties • Arm’s length principle • Comparability • Transfer pricing methods • Transfer pricing is a ‘neutral concept’

  3. Significance of MNE Groups The Significance of Transfer Pricing in Today’s Economy • Number of foreign affiliate firms has increased 6 fold over the last 2 decades (UNCTAD WIRs) • Of the world's 100 largest economic entities in 2012, 40 (40%) are corporations (Global Trends, 2013) • A substantial portion of international trade takes place within MNE Groups. Various figures are often quoted: • 30% (UNCTAD, 1999) • 60% (OECD, 2013) • UNCTAD estimates that around 80% of global trade (in terms of gross exports) is linked to the international production networks of TNCs

  4. Proliferation of Transfer Pricing Rules The Significance of Transfer Pricing in Today’s Economy • Identified as a development priority for developing countries • Exponential growth of countries with “effective” transfer pricing rules : • Central to G20-endorsed, OECD “base erosion and profit shifting” action plan (BEPS)

  5. Global (Centralized) Business Models The Significance of Transfer Pricing in Today’s Economy • MNE Groups have increasingly restructured their business operations in order to maximize synergies, reduce costs (including tax) and increase efficiency • This typically has involved the centralization of certain functions, assets and risks in principal entities • This has had a profound impact on international trade

  6. Importance of Intangibles (Source: Means, Schneider, “Meta-capitalism”, 2000) The Significance of Transfer Pricing in Today’s Economy • Investment in “intangibles” has increased dramatically over the past four decades. Consumer behavior has changed and business has adapted (and vice versa). • Estimated that the preponderant form of wealth worldwide is intangible capital (World Bank) • Intellectual property accounts for more than 50% of the value of many public companies (brandchannel.com)

  7. Intangibles, MNE Groups and Trade: FMCG Industry (Source: Oxfam, Behind the Brands ) The Significance of Transfer Pricing in Today’s Economy

  8. Transfer Pricing is a key driver of MNE pricing The Significance of Transfer Pricing in Today’s Economy • “the tax requirements of transfer pricing play a prominent role in the multinational enterprise’s decision-making process” (Cools, 2003) • Recent survey by EY of MNE groups across 26 countries found: • Only 21% reported that they took customs issues fully into account, and • Only 27% said they took VAT issues fully into account when making transfer pricing decisions.

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