Issues Related to Transfer Pricing
Although transfer pricing helps in an overall reduction of tax reduction, it comes with certain issues. Issues related to transfer pricing are majorly divided into three subcategories namely, Jurisdiction issues, Allocation issues, and Valuation issues. These three are explained below:
1. Jurisdictional Issues: Transfer Pricing helps in the determination of the tax base of the respective countries of different entities that are involved in cross-border transactions. The multinational company as a whole, along with both the governments (say government of country A and country B) are included while considering the cross-border tax. When the government of one country (say country A) taxes the transactions of the MNC, it will affect the tax base of another country (say country B) as well. Basic jurisdictional issues involve the decisions,
- Which government should tax the transactions? and what if the government of both countries claims the same?
- If the tax base of one country rises, should the government of another country give relief to transactions to reduce the tax burden?
- What is the effect of imputation tax benefits in the parent company’s country of residence?
2. Allocation Issues: Government demands an optimal and clear allocation of resources among various entities of an MNC to calculate tax. These entities may enter into a tug-of-war situation to get the resources to increase the tax base of the respective country. Intangible and service-related should not be just allocated to save tax, as these items are a source of competitive advantage and need a proper watch.
3. Valuation Issues: Valuation issues undertake the methods and rules of valuing the revenues and expenses within the entities of MNCs, where there is a conflict of interest from the side of the government. Sometimes, there arises a tension between the goals of MNC and the overall economic and social goals of the country. The entities try to maximise their profits and minimise their tax burden by staying within the boundaries only which have been set by the government of the respective nation. These lead to clashes between the goals of MNCs, and the overall social, economic, and political goals of the nation.
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