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Using Transfer Pricing for Tax Mitigation

Updated on October 14, 2012

Transfer pricing and tax mitigation

We know that one of objectives of transfer prices is to reduce the tax liabilities of businesses with international operations. It is often claimed that many of these businesses adopt novel transfer pricing policies, combined with complex organisational structures, to ensure that profits are reported in those countries where tax rates are low. Where there are doubts over the legality of these complicated manoeuvres, the tax authorities must try to unravel them.

Real World case study below provides an example of where disappointing tax levies from large businesses has led to the finger of suspicion being pointed at transfer pricing.

Objectives of transfer Pricing

Tax authorities in various countries are trying to stamp out transfer pricing abuses. Investigations of transfer pricing policies of individual businesses are becoming more common and cross-border co-operation between tax authorities has increased. Information is exchanged and treaties are signed which set out transfer pricing rules that businesses are expected to follow.

Real World case study below suggests that the efforts of the various tax authorities have had some effect.

It is, perhaps, worth mentioning that not all tax authorities have the resources and expertise to investigate what can be complex and opaque practices. Developing countries, for example, may find it hard to mount a serious challenge to transfer pricing abuses.

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