23 Transfer pricing and tax Transfer pricing is a common practice done by the

23 transfer pricing and tax transfer pricing is a

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2.3 Transfer pricing and tax Transfer pricing is a common practice done by the multinational or trans-national companies in order to reduce tax burdens and maximize profits. From a tax point of view, this practice is vulnerable to abuse where, and to the extent, an enterprise with subsidiaries and affiliates in different countries manipulates the prices charged to and by its various subsidiaries and affiliates to shift income away to the low or no tax jurisdiction. In such a way, the profit gained shows a small amount in papers and evade themselves from tax liabilities. In order to implement such practice, the company will create a strategy where they establish a parent or subsidiary company in a tax-haven country so that sale transactions can occur between the two divisions. The determination of transfer pricing of its value potentially affects net income and as a result, it might have tax that has to be paid by the company. The transfer prices are considered a deductible charge from the taxable basis for the party which pays for it, and it is added in the taxable basis of the related party receiving the payment. The discrepancy of national taxation systems and rates can create an opportunity to deceive the tax liabilities by manipulating the value of transfer prices ( over-valuing payments to 6
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higher tax rates countries and under-valuing transactions to lower tax rate countries) or by making the entities in lower tax rates charging the related entities in higher tax rates for goods or/and services to shift profits to a more friendly-tax jurisdiction. On the other hand, the state has to contradict objective with the company where they tend to attract the largest taxable base in their own jurisdiction. The concern is more about the relationship between multinational groups and at least two different tax authorities. Therefore, good management in transfer pricing is very important to address the issue regarding the misconduct of transfer pricing. The artificial localization of results and expenses to minimize tax expense and the risk of double taxation in two different countries can be avoided if both parties, either state, and company can work together to create the most effective management. 2.4 Common issues related to transfer pricing Corporate tax avoidance is inevitable. Multinational subsidiaries which are located in tax havens, become a place to evade from paying. The offshore accounting trick by these corporations have created an unsymmetrical information between where the companies do their investments, on one hand, and where the company collect their profits, on the other. In a 2008 report, the researcher found out that American multinational companies reported their foreign earnings in several tax haven countries such as Bermuda, Ireland, Switzerland, Luxembourg, Singapore, and so forth. In contrast, they only declared earnings just 14% from the profits in U.S trading partners with higher tax rates - which accounted for 40% of their foreign investment workforce and 34% of their foreign investment.
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  • Spring '19
  • Ahmad Mutaaqin
  • The Road, Vodafone Group Plc, Vodafone India Transfer Pricing Case

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