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Taxing the multinationals

Posted by Nick Prag at 05 June 2014, 18:00 CET |
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The issue of transfer pricing may not sound too exciting but it is an important issue of taxation which the European Commission is under increasing pressure to tackle.

The Commission this week adopted a Communication on the work of the EU Joint Transfer Pricing Forum (JTPF) in the period July 2012 to January 2014 which includes the JTPF reports on secondary adjustments, transfer pricing risk management and compensating adjustments.

Transfer pricing refers to the price charged as part of in-house transactions within a multi-national company. It refers to prices charged between, for instance, a parent company and its controlled foreign subsidiary for the transfer of goods and services or other intangible assets.

In principle a transfer price ought to match either what the seller would charge an independent, arm's length customer, or what the buyer would pay an independent, arm's length supplier.

But as these prices are set by non- independent associates within the multi-national means, and often do not reflect an independent market price, makes this a major concern for the tax authorities of EU governments who worry that multinationals are setting arbitrary transfer prices for their cross-border transactions with the aim of reducing taxable profits in their jurisdiction.

As tax rates on company profits differ from country to country, these differentials encourage companies to set transfer prices that shift profits from the high-tax countries to those with lower taxes, thus reducing a multinational's overall tax.

Transfer pricing is therefore a major issue of tax compliance, and this is why governments are increasingly keen on transfer pricing controls.

The JTPF is likely to propose possible improvements to the Code of Conduct - guidelines set up to avoid arbitrary pricing - on transfer pricing documentation for associated enterprises in the EU.

Communication on the work of the EU Joint Transfer Pricing Forum in the period July 2012 to January 2014 - background guide

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Nick Prag

Nick Prag

Nick Prag is founder and managing editor of Prior to EUbusiness, he was senior editor at Europe Online SA in Luxembourg, where he played a major part in the launch of Europe Online International.