The Accountant Sep-Oct 2016√(2)

Business Practice and Development
TRANSFER
PRICING
By CPA Irene Muthoni Wambugu, irene_wambugu@yahoo.com
and CPA Faith Mukami Muriuki, muriukifaith@gmail.com
What it really means
Transfer pricing is the general term for
the pricing of cross-border, intra-firm
transactions between related parties.
Transfer pricing therefore refers to
the setting of prices for transactions
between associated enterprises involving
the transfer of property or services.
These transactions are also referred to
as “controlled” transactions, as distinct
from “uncontrolled” transactions between
companies that are not associated and can
be assumed to operate independently (“on
an arm’s length basis”) in setting terms for
such transactions.
Significant volume of global trade in
the present day consists of international
transfers of goods and services, capital
and intangibles within a Multinational
Enterprise (MNE) group; such transfers
are called “intra-group transactions”.
A large and growing number of
international transactions are therefore no
longer governed entirely by market forces,
but driven by the common interests of the
entities of a group.
Transfer pricing does not necessarily
involve tax avoidance, as the need to set
such prices is a normal aspect of how
MNEs must operate. Where the pricing
does not accord with internationally
applicable norms or with the arm’s
length principle under domestic law, the
tax administration may consider this
to be “mispricing”, “incorrect pricing”,
“unjustified pricing” or non-arm’s length
pricing, and issues of tax avoidance and
evasion may potentially arise.
Transfer Price beyond
Taxation
Advance planning for transfer pricing
allows multinational enterprise to
consider implications beyond taxation.
These may range from the effect of
corporate restructuring, supply chain
management, compensation plans and
legal implication. For instance, a change
20 SEPTEMBER - OCTOBER 2016