Transfer pricing – IAS 12 Best complete read

Transfer pricing
 for
transactions between related parties

A transfer price is the price charged between related parties (e.g., a parent company and its controlled foreign corporation) in an inter-company transaction. Although inter-company transactions are eliminated when consolidating the financial results of controlled foreign corporations and their domestic parents, for preparation of individual tax returns each entity (or a tax consolidation unit of more than one entity in the group in one and the same tax jurisdiction) prepares stand-alone (or a tax consolidation unit) tax returns.

See also:

IAS 24 Related parties narrative IFRS 15 Revenue narrative IAS 12 Income tax narrative

Transfer prices directly affect the allocation of group-wide taxable income across national tax jurisdictions. Hence, a group’s transfer-pricing policies can directly affect its after-tax income to the extent that tax rates differ across national jurisdictions.

Arm’s length transaction principle

Most OECD countries rely upon the OECD TP Guidelines for Multinational Enterprises and Tax Administrations, that were originally released in 1995 and subsequently updated in 2017 (OECD TP Guidelines). The OECD TP Guidelines reaffirmed the OECD’s commitment to the arm’s length transaction principle.

In fact, the arm’s length transaction principle is considered “the closest approximation of the workings of the open market in cases where goods and services are transferred between associated enterprises.” The arm’s length principle implies that transfer prices between related parties should be set as though the entities were operating at arm’s length (i.e. were independent enterprises).

The application of the arm’s length transaction principle is generally based on a comparison of all the relevant conditions in a controlled transaction with the conditions in an uncontrolled transaction (i.e. a transaction between independent enterprises).

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Related parties transfer pricing

Related parties transfer pricing is one of the most important issues in international tax and as a result also needs disclosure under IAS 24 Related party disclosures.

Transfer pricing is the general term for the pricing of cross‐border, intra‐firm transactions between related parties. These transactions can include transfers of intangible property, tangible goods, or services as well as loans or other financing transactions.

Most countries’ transfer pricing legislation is based on the ‘arm’s length principle’.

Transfer pricing methodologies

There are a number of transfer pricing methodologies for determining the arm’s length basis of a transaction. For example, the OECD recognises Comparable Uncontrolled Price, resale price, cost plus, transactional net margin, and transactional profit split methods as acceptable but other … Read more