Page 71 - F1 Integrated Workbook STUDENT 2018

International Taxation

Transfer pricing

Transfer pricing applies to group situations when either goods are sold inter-company
or a loans take place at a favourable price. Therefore, this results in transactions not
taking place at "arms- length" and profits being effected by the group members. This
could be done when an overseas entity moves profits to another country at a lower
tax rate.

There are measures in place to counter-act this from happening and the work that
the OECD are currently doing to base profits and charging between international
entities.

This could also be perceived by the public as a method of tax avoidance and entities
may be criticised for not paying their fair share of tax.

The rules for transfer pricing are as follows:

(1) Goods and services – An adjustment will be made in the corporate tax
computation for the entity gaining the tax advantage to reflect profit that would
have been achieved if the transaction had been arms-length.
(2) Provision of loan finance – The rules apply to the amount of the loan and
interest charged on the loan. Thin capitalisation refers to the situation where the
amount of loan finance provided to a connected company exceeds the amount
a third party would be willing to provide. This results in the Interest charged on
the amount of the loan that exceeds the amount a third party would lend is not
allowable for tax purposes and will therefore be disallowed.

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