The transfer pricing and tax havens is a complex issue that appeared in the context where different groups of firms present in different countries to perform economic activities. It is commonly known as business globalization and internationalization. The transferrin cost raises the interest of fiscal authorities and represents the particular area for investigation within their fiscal control. Transfer pricing describes the costs and becomes a practical reality at which the services and goods are bought or sold. The transaction types of inter-companies involve provisions to sale good and services and the sale of intangible and tangible assets along with intercompany finances.
It is not easy to establish transfer pricing for global operations that may involve running particular engagements with costumes like price setting, risk management and marketing activities linked to a specific financial product line or product. It is complicated to understand transfer pricing. Different sections of an organization transact mutually at a price. For instance, it may include transactions like trading supplies between various departments. Multi-entity companies frequently use them where the individual units of the company are separately treated.
Transfer Price and Its Impact
In this situation, each unit is responsible for its profit and return on their invested capital. If a multi-entity company has different units (accountable for their profit), this division can transact with each other and transfer price is utilized. This price may not have massive difference than market cost because one unit will always get lost with a difference in price. This situation can affect the performance of this unit in the long run along with the total financial health of a multi-entity organization. The transfer price must not have dramatic difference than the market price. It should be economical to avoid any negative impact on the health of this organization. The code of arm’s length pricing is the main reason behind this rule. Arm’s length pricing means the price charged by a unit to another unit for a product should be same if these units are associated with each other.
How to use tax havens?
Transfer pricing is an essential issue of international and national taxation. This concept was developed in Romania in 1994, but the necessary legislation for the application of arm’s length standards was not there until 2000. Tax heaven is a term used for authorities or states where the burden of the tax is low or even nonexistent. Similarly, the tax havens are known as tax shelters because of their advantages. Their attraction lies on fiscal reasons and optimized by confidentiality and secrecy of the developed operations and infrastructure.
Transfer pricing means the costs at which dealings occur between firms of a similar group and frequently utilized by multinational organizations to favor particular subsidiaries and fiscal optimization. It is a legitimate opportunity for businesses to transact at the same cost and avoid taxation and financial distortion.
Main Issues in Transfer Pricing
The transfer pricing determines the revenue of two parties doing cross-border transactions and the price deals with the taxation principles of the involved countries. It means the transfer pricing should solve three critical issues.
Jurisdictional Issues
States often find ways to avoid dual taxation of business income, but it can be tricky with transfer pricing. It is complicated to define that which country has right to deduct tax of a transaction. In numerous cases, the companies use this as an avoidance tool to evade taxes.
Allocation Issues
Numerous multinational organizations share common overheads and resources; therefore, allocation of common resources is really important. When you talk about taxation, it can be difficult to allocate resources efficiently. There will be a huge difference between their policies and transfer pricing is considered to avoid this distribution dilemma.
Valuation Issues
The expenses and income related to transfer prancing should be accurately valued that is an important issue for numerous companies. Lack of international rules for corporate taxation can create a problem. In this situation, the companies use valuation tool to exploit all possible differences.
Financial accounting overlooks affiliates, and corporatist groups are treated as a sole entity. In this situation, the multinationals get the advantage of Transfer Pricing and Tax Havens. They report considerable profits in possible tax havens like Ireland, Switzerland, Luxembourg, and the Cayman Islands.
