Transfer Pricing Controversy

It is widely acknowledged that disputes arise as to the correct amount of tax payable in an area such as transfer pricing. Transfer pricing disputes – referred to as enquiries or audits – arise between tax authorities and businesses and involve tax authorities checking the ‘arm’s length’ nature of the transfer pricing applied between the different entities/permanent establishments of a multinational business.

The enquiry process involves tax authorities gathering information in order to determine whether the transfer pricing applied results in the local entity earning an ‘arm’s length’ amount of profits. In the enquiry, if a business cannot successfully defend their pricing, this can lead to transfer pricing adjustments which increase the amount of profits taxed in that country – resulting in double taxation, if those profits have been taxed elsewhere.

The resolution of double taxation disputes forms a large part of transfer pricing controversy. This includes eliminating double tax resulting from adjustments made as a result of an audit or enquiry by using Mutual Agreement Procedures (MAPs). MAPs can involve binding transfer pricing arbitration if the tax administrations in the relevant countries cannot reach agreement. Transfer pricing controversy also includes preventing double tax arising by seeking up front agreement with tax authorities through Advance Pricing Agreements (APAs).