Mr. Colin Clavey, World Bank/IFC - International Tax Dialogue

Session 2c
TRANSFER PRICING
LEGISLATION
Colin Clavey
ITD Conference
December, 2012
Thailand

The average time
for settling
transfer pricing
cases is about
540 days
Transfer pricing
audits are easy
to open, but
difficult to close
Personnel
issues are
crucial
The stock of open
cases tends to be high
(in some cases 3-4
times the average
number of annual
settlements
Some countries recover
very little from their
transfer pricing audits,
whereas others recover
very large amounts
from almost all audits
There are examples of
countries which have had
transfer pricing
legislation in place for
some years - but yet not
conducted a single audit

Transfer pricing rules…..
• Ensure multinational enterprises pay the right amount of tax
• Counter artificial cross-border profit – shifting and tax avoidance
• May assist in countering capital flight
• Create a predictable business landscape, which avoids double
taxation or less than single taxation
• Promote legitimacy of the tax system - where large and high profile
taxpayers are known to avoid taxation, compliance among all
taxpayers is discouraged, and the legitimacy of the tax system – and
wider government institutions - is undermined

Are Transfer Pricing Rules Needed?
• Value and pattern of cross-border trade
• Level of MNE operations
• Level of FDI
• Evidence of “high risk” factors e.g. transactions
involving low tax jurisdictions, artificial arrangements
( See OECD’s “Country Risk Assessment” tool)

Are the basic building blocks in place?
• Are companies required to maintain audited
financial accounts?
• Are companies subject to company income tax on
their profits?
• Is there experience in the country of auditing the
returned profits of multinational enterprises?
• Are there effective tax collection procedures in
place?
• Are there effective dispute resolution mechanisms
(courts and appeal processes) in place?

Is there political and administrative
commitment?
• Is there political buy-in?
• Is there resource availability to create a
team of transfer pricing specialists?
• Is there resource and willingness for a
group of auditors to undergo specialist
training?
• Is there commitment to setting up transfer
pricing management and oversight
processes?

Other Considerations
• Are other tax measures likely to have a more
immediate impact? e.g. thin capitalisation
rules and what resources are needed for these
measures
• Is there a case for limiting the scope of
transfer pricing rules, or their
implementation, in the early stages? E.g. to
specific sector
• Is there a case for introducing transfer
pricing simplification measures for less
complex or smaller transactions?

Key elements of a successful transfer
pricing regime
• Effective Primary legislation
• Ancillary legislation: documentation; information
powers; penalties; APAs
• Formation of a specialist team
• Development of specialist skills
• Effective risk assessment and case selection
processes
• Effective audit processes
• Effective audit governance procedures
• Effective dispute prevention and resolution
processes

TP legislation – key objectives
• To require taxpayers to return a taxable
profit in line with arm’s length terms
• To allow tax authorities to make
adjustments to returned profit where nonarm’s
length terms have been used
• To relieve double taxation??

Scope of legislation
Rules generally apply to transactions
between associated enterprises that
take place cross-border.
Is there a policy requirement to apply the
rules to purely domestic transactions?
And, if so, is a corresponding adjustment
available?

How to define associated enterprises?
• Enterprises are associated where one
controls the other, or they are under
common control.
• How define control?
• Dangers in defining too widely?
“Sum of loans provided to the enterprise is greater than 50%
assets”
“Value of sales to, or purchases from, the enterprise is greater
than 50% of turnover”
.. Or too narrowly?

Aims of the legislation..
Country A
Country B – Low tax
Trading Co
Management
Fees
Management Co

Effect of legislation
• Taxpayers required to report an arm’s
length measure of profit
• Where they do not:
- tax administration can make an
adjustment to taxable profit.
Adjustments are normally one-way only –
to increase taxable profit

Testing arm’s length terms
• 5 transfer pricing methods
Other method if taxpayer can show it gives
an arm’s length result.
• Comparability – meaning and
comparability factors
Reference to international principles?

Primary v Secondary legislation
Less flexibility?
Less clear?
Less tight?
Legislation
Regulations
&
Guidance

Primary v Secondary legislation
More flexibility – can respond to specific
issues
Clearer
Legislation
Regulations
&
Guidance

Simplification measures
• Exemptions for smaller taxpayers, and
smaller transactions?
• Administrative simplifications –
streamlined APAs, reduced
documentation requirements
• Safe harbours

Ancillary rules
• APAs
• Documentation requirements
• Return requirements
• Information powers
• Penalties