Page 49 - Strategic Tax Planning for Global Commerce & Investment

Strategic Tax Planning for Global Commerce and Investment

income that has been earned by a foreign related party in anoth-
er tax jurisdiction.

A secondary tax effect can add to the burden of income adjust-
ment. Depending on the relationship of the parties and the
direction of the income reallocation, the effect could be deemed a

dividend subject to withholding (example, if a U.S. subsidiary of
a foreign parent overpaid for goods, unless the overpayment is
returned, the subsidiary is deemed to have paid a dividend to

the parent).

Background

The concept of transfer pricing was first applied during World
War I by U.K. in 1915 and the U.S.A. in 1917.

Transfer pricing arises simply as a preventive tool and it was not

until after World War II when it acquired greater importance.
The first body that studies the concept of transfer pricing is the
United Nations, conceptualizing the first international regulato-
ry efforts between 1928 and 1935. These early studies are still in

effect and its guidelines are reflected in a tax model called
"United Nations Transfer Pricing Model".

The following table shows a brief history of the major regulatory

process that established and set forth the current guiding princi-
ples affecting the application of transfer pricing:

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