General Tax Principles
Commonly controlled taxpayers often determine prices charged between such taxpayers based in part on the tax effects, seeking to reduce overall taxation of the group. OECD Guidelines state, at 1.2, “When independent enterprises deal with each other, the conditions of their commercial and financial relations (e.g., the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises deal with each other, their commercial and financial relations may not be directly affected by external market forces in the same way.” Recognizing this, most national and some sub-national income tax authorities have the legal authority to adjust prices charged between related parties. Tax rules generally permit related parties to set prices in any manner they choose, but permit adjustment where such prices or their effects are outside guidelines.
Transfer pricing rules vary by country. Most countries have an appeals process whereby a taxpayer may contest such adjustments. Some jurisdictions, including Canada and the United States, require extensive reporting of transactions and prices, and India requires third party certification of compliance with transfer pricing rules.
Read more about this topic: Transfer Pricing
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