• No results found

The Transfer Pricing Method of a Multinational

N/A
N/A
Protected

Academic year: 2021

Share "The Transfer Pricing Method of a Multinational"

Copied!
79
0
0

Bezig met laden.... (Bekijk nu de volledige tekst)

Hele tekst

(1)
(2)

The Transfer Pricing Method of a Multinational

Auteur: Oscar Boot

Studentmummer: 0993352 Datum: 11-08-2007 Plaats: Amsterdam

De auteur is verantwoordelijk voor de inhoud van het afstudeerverslag. Het auteursrecht van het afstudeerverslag berust bij de auteur.

Afstudeerbegeleiders Rijksuniversiteit Groningen:

1e begeleider: Mevrouw J. van der Meer-Kooistra.

2e begeleider: Mevrouw I.J.J. Burgers.

Afstudeerbegeleider organisatie: De heer J. Nijhuis.

(3)

Management Summary

In the management summary an overview of the study will be presented. In the overview, there will be reference to the chapters where the information can be found.

In the first chapter the methodology of the research is described. This chapter explains the background on why the research was started. Raxo had acquired its subsidiaries in 2003 and the transfer pricing method used was based on the old method of the subsidiaries. A research was started to review this method and to determine if improvements could be made in establishing the user of the service and the charge for the services.

This resulted in the following research objective:

To review the current method of transfer pricing for the headquarters of Raxo and to identify improvement opportunities for the current method in order to

improve the transfer pricing method for Raxo, while at the same time

comply with the transfer pricing regulations of the countries where Raxo is active.

The chapter continues with the research questions and the conceptual model. An outline of the research with the methods of observation and sources used is given in section 1.8. The chapter finishes by clarifying some terms that are central in the research.

In the second chapter the transfer pricing issue is discussed. It starts off with a description of the company this research was conducted at. It follows with an example to demonstrate the issues involved in transfer pricing. Next the relevance of transfer pricing for multinational enterprises and other parties involved is explained.

The third chapter focuses on the transfer pricing method. The elements of a transfer pricing method will be explained. There is also focus on the regulations involved in transfer pricing.

In the fourth chapter, the current transfer pricing method of Raxo is reviewed and recommendations are made to improve the method. It will focus on allocation of the costs and the setting of the right transfer price.

In the fifth chapter the research findings are presented. Improvement opportunities were identified: Use of specific allocation keys to better allocate the costs to the user of the service.

Use of cost carriers to better calculate the cost and user of a service. Use of a cost-plus method to establish the transfer price.

(4)

The Transfer Pricing Method of a Multinational

3

Introduction

This thesis describes a research on transfer pricing at Raxo Europe. Raxo Netherlands B.V. is the headquarters of Raxo Europe. Raxo Europe consists of a group of European paper merchants. Raxo headquarters provides the group with a variety of services, in exchange for which a transfer price is being paid. In this thesis transfer pricing refers to cross-border transfer pricing. Cross-border transfer pricing is the process of setting prices for transactions between related parties in more than one tax jurisdiction. More than 60% of world trade takes place within multinational enterprises. (Neighbour, 2002) By applying a transfer price, income is shifted from one entity of a multinational enterprise (MNE) to another. In recent years, tax authorities throughout the world have increased their focus on transfer pricing. The transfer price affects the income and expense and therefore the taxable income of the parties in their respective tax jurisdictions. Different tax jurisdictions can hold different tax rates. A lower tax-base in a tax jurisdiction means lower income for the jurisdiction, therefore tax authorities have requirements on how the transfer price should be set.

This research focuses on the transfer pricing between Raxo headquarters and its subsidiaries. The subsidiaries are situated in various European countries; therefore Raxo headquarters has to consider multiple European tax jurisdictions and the requirements of the respective tax authorities.

(5)

The Transfer Pricing Method of a Multinational

4

Table of content

CHAPTER 1 RESEARCH METHODOLOGY ...6

1.1 INTRODUCTION...6

1.2 RESEARCH BACKGROUND...6

1.3 PROBLEM DEFINITION...7

1.3.1 Research Objective ...8

1.3.2 Primary Research Question ...8

1.3.3 Research sub-questions...8

1.4 CONCEPTUAL MODEL...9

1.5 RESEARCH TYPOLOGY...11

1.6 SOURCES AND METHODS OF OBSERVATION...12

1.7 RESEARCH RESTRICTIONS...13

1.8 RESEARCH OUTLINE...14

1.9 CLARIFICATION OF TERMS...15

CHAPTER 2 THE TRANSFER PRICING ISSUE...16

2.1 INTRODUCTION...16

2.2 RAXO...16

2.2.1 Products and markets ...16

2.2.2 The Headquarters ...17

2.2.3 The subsidiaries...18

2.2.4 Relationship headquarters and the subsidiaries...18

2.2.5 Transfer pricing at Raxo...19

2.3 TRANSFER PRICING...19

2.4 MULTINATIONAL ENTERPRISES...21

2.4.1 Tax...21

2.4.2 Compliance...22

2.4.3 Performance and control ...22

2.5 TAX AUTHORITIES...23

2.6 THE OECD ...23

CHAPTER 3 THE TRANSFER PRICING METHOD ...25

3.1 INTRODUCTION...25

3.2 TAX AUTHORITIES AND REGULATIONS...25

3.3 THE TRANSFER PRICING GUIDELINES...26

3.3.1 Separate entity approach to transfer pricing ...26

3.3.2 Arm’s length transfer price...27

3.3.3 Double taxation ...27

3.4 DETERMINATION OF THE SERVICES PROVIDED...28

3.4.1 Shareholder activities ...28

3.4.2 Duplication of a service ...29

3.4.3 Incidental Benefits ...29

3.4.4 On call services...29

3.5 DETERMINING THE ALLOCATION OF THE COSTS...30

3.5.1 Direct versus indirect method ...30

3.6 DETERMINING THE TRANSFER PRICE...31

(6)

The Transfer Pricing Method of a Multinational

5

3.6.2 Choosing a method ...33

3.7 CONCLUSIONS...34

CHAPTER 4 TRANSFER PRICING AT RAXO ...36

4.1 INTRODUCTION...36

4.2 DETERMINATION OF THE SERVICES PROVIDED...36

4.2.1 Current method...36

4.2.2 Possible shortcomings and recommendations...38

4.3 DETERMINING THE ALLOCATION OF THE COSTS...40

4.3.1 The entities of Raxo Europe ...41

4.3.2 Current method...42

4.3.3 Possible shortcomings ...43

4.3.4 recommendations...43

4.3.5 Total allocation...52

4.3.6 Observations of cost centers ...53

4.4 DETERMINING THE TRANSFER PRICE...54

4.4.1 Current method of determining the transfer price...54

4.4.2 Possible shortcomings ...54

4.4.3 recommendations...55

CHAPTER 5 RESEARCH FINDINGS ...63

OTHER CONSIDERATIONS...65

BIBLIOGRAPHY...67

ANNEX A: WORLD-WIDE STRUCTURE OF THE COMPANY...69

ANNEX B: STRUCTURE OF RAXO HEADQUARTERS...70

ANNEX C: LIST OF OPERATING COUNTRIES OF RAXO ...71

ANNEX D: ARTICLE 9 OF THE MODEL TAX CONVENTION ...72

ANNEX E: OECD MEMBER COUNTRIES ...73

ANNEX F: COST CENTERS...74

ANNEX G: COST CARRIERS ...75

ANNEX H: EXAMPLE OF GENERAL ALLOCATION KEY...76

ANNEX I: EXAMPLE OF A REGIONAL ALLOCATION KEY...77

(7)

The Transfer Pricing Method of a Multinational

6

Chapter 1

Research methodology

1.1 Introduction

In this chapter the methodology of the research will be described on the basis of the book by A.C.J. De Leeuw; Bedrijfskundige methodologie. (De Leeuw, 2001) The methodology specifies the organization of the research process. In the first section the background of the research will be given. The main objective of the research and the research questions will be given in the second section. Next, a conceptual model will explain the relationships of the issues involved. After the conceptual model, the type of research, the sources and methods used and the restrictions of the research will be presented. In section 1.8 an outline of the research will be given, which explains how and where in the thesis the research questions will be answered. At the end of the chapter some of the terms that are used frequently in the thesis will be clarified.

1.2 Research Background

The research was initiated by the financial team of the headquarters of Raxo Europe. Raxo is a world-wide paper merchant and manufacturer. The ultimate parent company is Raxo Limited Australia. The scope of this research will be limited to Raxo Europe. Therefore, in this thesis, Raxo refers to Raxo Europe. There is an outline of the world-wide company structure provided in Annex A.

Over the last couple of years Raxo has expanded rapidly in Europe. In July 2002 the company acquired the Renz Fine Paper, renamed Price Company. In November 2003, they acquired HTI’s paper

merchanting division. This resulted in the company structure as it is today, with one headquarters and 27 subsidiaries in various European countries.

The headquarters of Raxo is situated in Amsterdam and is providing services for the benefit of its European subsidiaries. Examples of these services are marketing campaigns, legal advice, finance activities and IT services. The subsidiaries are paying the headquarters a fee for these services. This is called the transfer price. The method of determining what transfer price each subsidiary has to pay for their services is the transfer pricing method.

In some of the literature the transfer pricing method stands for the method of calculating the transfer price of goods or services provided by a dependent company. (For instance, in the OECD guidelines) In this thesis, the transfer pricing method is used in a broader sense. In this thesis, the transfer pricing method is the process of determining:

(8)

The Transfer Pricing Method of a Multinational

7 i. What services are rendered that can be charged with a fee?

ii. The cost allocation. Who are the users of the service? Which users benefit from the services provided and what proportion of the costs of the services should be charged to them?

iii. What is the fee that should be charged?

The method Raxo headquarters uses to determine the transfer price of the services it provides is based on a method that was inherited from the time the subsidiaries were part of HTI N.V. The headquarters wanted a review of this method and recommendations for possible improvements.

During the initial interviews with the managers at Raxo Headquarters, some possible improvement areas were mentioned.

1) There should be a better understanding of the relationship between costs incurred for the provision of services and the actual users of those services. This means that the subsidiaries that actually benefit from the services provided by the headquarters should be charged for those services.

2) There should be a better understanding of how much is charged for the services and how that charge is calculated.

3) Furthermore, every country that Raxo operates in has regulations on the setting of transfer prices. These transfer pricing regulations are put in place by the various tax authorities.

Any recommendations for improvements of the transfer pricing method should comply with these regulations.

Number one and two can be seen as performance problems. They focus on improving the performance of the transfer pricing method.

Number three is a compliance problem. The method, including the improvements should comply with the regulations of the tax authorities involved.

This was further developed into a problem definition including the research definition and the research questions. These will be discussed in the next section.

1.3 Problem definition

In this section the problem definition is given. The problem definition contains the objective of the research, the questions that the research is trying to answer and the reason why the answers are relevant. The problem definition has been derived from the research background, discussed in section 1.2.

(9)

The Transfer Pricing Method of a Multinational

8

1.3.1 Research Objective

The research objective describes for whom the research is performed, what will be produced by the research and why that is relevant to the commissioner of the research. (De Leeuw, 2001)

1.3.2 Primary Research Question

The primary research question is the main question that the research is trying to answer. The primary research question for this research is:

1.3.3 Research sub-questions

The primary research question can be split into research sub-questions. The research sub-questions helps us to answer the primary research question. By answering the sub-questions the primary research question will be answered.

The research sub-questions are chosen in a way that answering the research sub-questions will lead to the answer of the primary research question presented in section 1.3.2.

The research objective is to review the current method of transfer pricing for the

headquarters of Raxo and to identify improvement opportunities for the current method in order to

i) improve the transfer pricing method for Raxo, while at the same time

ii) comply with the transfer pricing regulations of the countries where Raxo is active.

What is the current method of transfer pricing used by Raxo and what (if any) are the improvement opportunities for this method?

(10)

The Transfer Pricing Method of a Multinational

9 The research sub-questions are:

What is transfer pricing?

What parties are involved in the process of transfer pricing?

What are the issues involved in the process of transfer pricing for those parties? What are the elements of a transfer pricing method?

What are the regulations involved in the transfer pricing method? How can these regulations be met?

What are the issues involved with a transfer pricing method?

What is the current method of transfer pricing at Raxo headquarters? Are there improvement opportunities that can be made to this method?

In section 1.8 a research outline will be presented, which will explain in which chapters of the research the sub-questions will be answered.

1.4 Conceptual model

The conceptual model in the research shows the broad perspective of what is the basis for the research. (De Leeuw, 2001) It shows the relationships between the subjects that have a central place in the research. Next, the conceptual model of this research is given, which is subsequently explained.

(11)

The Transfer Pricing Method of a Multinational

10 Regulations of the tax authorities OECD Guidelines

Transfer pricing method

Figure 1: The conceptual model

Tax Compliancy Performance control What services are provided?

What is the cost allocation? What is the fee charged?

Influences

Explanation of the model

The transfer pricing method should comply with the regulations of the tax authorities involved. The various tax authorities of the countries that Raxo is operating in have regulations in place. A great portion of these regulations is based on guidelines issued by the Organisation for Economic Co-operation and Development (OECD). These guidelines give directions for MNE's on the method of transfer

pricing. For a MNE to comply with the regulations of the tax authorities, it should follow the guidelines by the OECD.

While complying with the regulations, the transfer pricing method should determine: i. What services are rendered that can be charged with a fee?

ii. The cost allocation. Who are the users of the service? Which users benefit from the services provided and what proportion of the costs of the services should be charged to them. iii. What is the fee that should be charged?

(See also section 1.2)

The transfer price is important to a multinational enterprise, because the transfer price influences some important elements of the MNE.

(12)

The Transfer Pricing Method of a Multinational

11 First, by applying a transfer price, the profit of the subsidiaries is influenced. Therefore, the

taxable income of the subsidiaries is influenced.

Second, the choices made in the transfer pricing method will influence the compliancy of the MNE with the regulations of the tax authorities.

Finally, because transfer pricing influences the profit of subsidiaries, a change in transfer price could influence the performance of the subsidiaries.

The MNE should be aware of these influences.

These issues mentioned in the conceptual model will be discussed further in the thesis.

1.5 Research typology

In order to achieve a good fit between the research output and the knowledge need of the recipient, it is helpful to determine the type of research that is conducted. (De Leeuw, 2001) Different types of research have different goals that they are trying to achieve.

De Leeuw makes a distinction between scientific and practicaloriented research.

Scientific research will produce an output that will produce general knowledge that will contribute to the general knowledge base.

Practical orientated research will produce an output for a specific recipient that can be used for specific management problems. This research is a practical orientated research. It has been performed for a specific recipient (Raxo headquarters) and can be used for specific management problems (transfer pricing).

Within the practical orientated research, a distinction is made between policy supporting research and problem solving research. Policy supporting research aims to deliver concrete knowledge, useful for a specific situation of a specific client. It will satisfy a part of the total knowledge need. Problem solving research will take the complete problem of the client and will try and satisfy all of the knowledge need. (De Leeuw, 2001)

In section 1.2 the knowledge need for Raxo was discussed. The company wanted to review its transfer pricing system and investigate whether improvements were possible. This research is a problem solving research. Its goal is to take into account the whole issue of transfer pricing and satisfy the knowledge need of transfer pricing for Raxo.

As the research is a problem solving research this has some consequences regarding the outcome of the research. The research has a specific client, with specific knowledge needs. This means that, although a great part of the research is applicable for other situations, the research will be focused on the specific

(13)

The Transfer Pricing Method of a Multinational

12 situation of Raxo. For example; the issue of transfer pricing arises by the delivering of goods and

services to a related entity. In this research the focus is on the delivering of services, because in the case of Raxo only services are delivered. Furthermore, the research will focus on the situation in Europe, because that is where Raxo is active.

Problem solving research can have two end products: Statements or design.

Statements should be in the form of recommendations for action taking to solve the problem. Design is the design of a system that works without the problem.

The product of this research is in the form of statements. It will provide recommendations for action taking to solve the problem.

1.6 Sources and methods of observation

In order to receive the information needed for the research, it has to be determined which sources are used and what methods of observation are applied.

Sources used for the research; • Actors

Managers of Raxo headquarters. Financial specialists of Raxo headquarters. • Books and documents

On the subjects of transfer pricing, on multinational companies and management and control. • Company documents

Internal documentation. Annual reports, service level agreements, reports on the subject of transfer pricing and financial reports.

• Company intranet and WebPages • Internet

Sites of the OECD, tax authorities, managerial sites on transfer pricing, managerial sites on multinational enterprises.

Methods of observation used for the research:

• Semi-structured interviews with the relevant actors • Literature study

• Desk research • Data analysis

In section 1.8 the different sources and methods will be discussed that are of use in answering the different sub-questions.

(14)

The Transfer Pricing Method of a Multinational

13

1.7 Research restrictions

The research restrictions describe the boundaries that the research is subject to. Two types of research restrictions can be distinguished; Restrictions with regard to the research results and with regard to the research process. (De Leeuw, 2001)

Restrictions with regard to the research results

The research results will be reported to the financial management team of Raxo. The research results will be reported to the faculty of business of the Rijksuniversiteit

Groningen.

The requirements of the Rijksuniversiteit Groningen on this thesis will apply.

The research results will be filed in the library of the Rijksuniversiteit Groningen. These results will become public. Because Raxo did not want company information to be included in public records, the name of the company will be disguised.

The research results will include recommendations but the implementation of the results will be outside of the scope of this research.

The fiscal portion of the research is based on the OECD guidelines, documentation on fiscal policy of various countries and the Global Transfer Pricing Guide (Ernst & Young, 2004) and the Transfer Pricing Strategy Matrix for Global Transfer Pricing (Deloitte, 2004). However, the complete system of fiscal regulations for each country is too comprehensive to take into account in this research.

Restrictions with regard to the research process

The research was conducted from September 2005 up to December of 2005. After this period the thesis has been written.

This research is based on the situation until the end of the year 2005. The period of data

collection was from September 2005 up to December 2005. Any changes in developments after this period are not included in the research.

As mentioned in section 1.2 the parent company is Raxo Limited. However the scope of this research is limited to Raxo Europe.

It is possible that before any changes to the transfer pricing method can be initialized, Raxo has to consult the parent company. This, however, is out of the scope of this research.

(15)

The Transfer Pricing Method of a Multinational

14

1.8 Research outline

In this section the research outline will be summarized. Figure 2 gives an overview of the research sub-questions. For each of these sub-questions it is outlined in which chapter the questions will be answered and what methods and sources are used.

Research sub-question Chapter Method Sources

What is transfer pricing? 2 Literature study Literature on transfer pricing. What parties are involved in the process

of transfer pricing? 2 Literature study Literature on transfer pricing. Literature on MNEs What are the issues involved in the

process of transfer pricing for those parties?

2 Desk research Interviews

Literature on transfer pricing Literature on MNEs

Literature on management control Managers, financial specialists, experts outside the company What are the elements of a transfer

pricing method? 3 Literature study Interviews Literature on transfer pricing Managers, financial specialists What are the regulations involved in the

transfer pricing method? 3 Literature study Literature on transfer pricing How can these regulations be met? 3 Desk research

Interviews Literature on transfer pricing Managers, financial specialists What are the issues involved with a

transfer pricing method? 3 Desk research

Interviews

Literature on transfer pricing Literature on management control Managers, financial specialists What is the current method of transfer

pricing at Raxo headquarters? 4 Desk research Data analysis Interviews

Company documents Company data

Managers, financial specialists Are there improvement opportunities

that can be made to this method? 4 Desk research Data analysis Interviews

Company documents

Literature on transfer pricing Literature on management control Company data

Managers, financial specialists

(16)

The Transfer Pricing Method of a Multinational

15

1.9 Clarification of terms

In this research terms that are used in the research will be clarified. There are terms that have a broader meaning in a general context but are used as working definitions; in this thesis they are used in a more specific way, than in their general meaning.

Transfer pricing

Transfer pricing is the process of setting prices for goods or services that are supplied between related enterprises. In this research the focus is on international transfer pricing and the definition of Przysuski is used. He defines transfer pricing as “prices that are set between related entities within a multinational group in different tax jurisdictions, when they transact in tangible goods, intangibles or services.” (Przysuski, 2005, p20)

Intra-group services

Intra-group services are the services that the transfer price is charged for. Not all services constitute as intra-group services. They have to be rendered according to the OECD guidelines. According to the guidelines an intra-group service is an activity (e.g. administrative, technical, financial, commercial, etc.) for which an independent enterprise would have been willing to pay or perform for itself.

Group entities

Group entities are the different entities of Raxo Europe. The entities consist mostly of the European subsidiaries. Examples of other entities are Investments Europe Ltd. as the shareholder of Raxo Europe and Raxo Shared Services B.V. which provides IT solutions for the subsidiaries.

Group costs

Group costs are the total costs that have incurred for the benefit of the different group entities. User of the service

Raxo headquarters is providing services for the subsidiaries. The user of the service is the subsidiary that intentionally benefits by that service. The word intentionally is used here, because in subsidiaries can benefit from the service without the service being meant to benefit them.

Tax authorities

In every country there is a tax authority that determines the requirements for transfer pricing. Tax jurisdiction

The tax jurisdiction is an area where one tax authority’s law applies. Ordinarily, a tax jurisdiction is within one country.

Tax-base

A tax-base is the amount of taxable income. It is the amount of income on which taxes need to be paid to a tax authority.

(17)

The Transfer Pricing Method of a Multinational

16

Chapter 2

The transfer pricing issue

2.1 Introduction

In this chapter the issue of transfer pricing is explained. In the first section the organization for which this research was conducted is described. The focus will be on the relationship between the headquarters and the subsidiaries, because of its importance to the transfer pricing issue.

In the second section the issues concerning transfer pricing will be explained. In the subsequent chapters transfer pricing is looked at from the perspective of different parties, namely the tax authorities, the OECD and the multinational enterprise (MNE).

2.2 Raxo

In this section, an overview of the organization is given and the issues that are relevant for Raxo with respect to transfer pricing will be described. The issues related to transfer pricing are explored in more detail in chapter 4.

2.2.1 Products and markets

Raxo is a world-wide paper merchant and manufacturer. As was mentioned in section 1.2, the scope of this research is limited to Raxo Europe. Raxo Europe does not manufacture paper itself, but has purely a merchant role. (See also the world-wide company structure in Annex A).

Paper, board and other materials are bought in bulk from paper mills around the world and sold in smaller quantities to the customers.

The European sales revenues are 57% of the world-wide sales revenue of Raxo. (figure 3, below)

Figure 3: World-wide sales of Raxo

Raxo World-wide Sales Asia 2% Australia 26% North America 15% Europe 57%

(18)

The Transfer Pricing Method of a Multinational

17 Raxo Europe operates through a network of merchants of paper and products related to print, office and display markets. Raxo Europe annually supplies close to three million tons of paper and related products to a wide variety of printers, publishers, sign makers and office market users. (Raxo annual report, 1995) These products include:

Commercial and office print

Display products (screen, sign and large format digital markets) Packaging

Envelopes

2.2.2 The Headquarters

The European Raxo group is managed from the headquarters located in Amsterdam, the Netherlands (Raxo Netherlands B.V.) It performs Management, Marketing, IT, HR, Legal and Financial activities (Reporting, Tax, Internal Audit) to provide a wide variety of services to the subsidiaries. To give some insight into the different activities performed at the headquarters, a data analysis was performed on all the costs incurred by Raxo in the year 2005. The different costs are presented relative to total cost in figure 4. legal other marketing IT hr financial manage ment general

Figure 4: Relative cost of activities

There are approximately 38 people working at the headquarters, most of which are dedicated to a particular activity or region (for example; the marketing department or regional president). An organizational structure of the headquarters is provided in Annex B.

A large proportion of the total costs of the headquarters is related to services provided to the subsidiaries of Raxo. Chapter 4 will discuss these costs in more detail.

(19)

The Transfer Pricing Method of a Multinational

18

2.2.3 The subsidiaries

Raxo has 27 subsidiaries in 19 European countries and 1 in South Africa. A detailed list of countries where Raxo operates is provided in Annex C. There are approximately 5500 people working at the subsidiaries.

Each subsidiary is in its own geographical area, without the competition of other related subsidiaries. The relationships between subsidiaries are small. Especially when they are in different countries, the contact between the subsidiaries is little. When they are in the same country the contact is sometimes intensified. In some cases they share warehouses between the subsidiaries. There are no transactions of goods or services between the subsidiaries.

Services are performed for the subsidiaries at the headquarters. The amount, size and kind of these services depend on the need of the subsidiaries.

For example; there are differences in size (turnover) of the subsidiaries. This could have consequences for the need of a particular service. The needs of a large subsidiary can differ from a small subsidiary. Data analysis showed that the number of times a services was performed for a large subsidiary were higher than for a small subsidiary. For example, a service performed by the headquarters is the provision of translations of documents. The number of translations for the larger subsidiaries were much higher than for the smaller subsidiaries.

Cost analysis showed that the amount paid on transfer prices to the headquarters is a considerable amount compared to the total costs of the subsidiaries. This makes the transfer pricing an important issue for the subsidiaries.

2.2.4 Relationship headquarters and the subsidiaries

The subsidiaries are managed by the headquarters in Amsterdam. There is no daily active control of the subsidiaries by the headquarters, but rather a general guidance for the benefit of the group. For example, the core operating principles provide a common direction for the group, giving guidance to all employees and encouraging alignment across the businesses and people. Activities are performed for the

subsidiaries according to their needs.

Every subsidiary has its own choice in the product mix they would like to offer to their customers. For example, display products are offered by 14 of the 27 subsidiaries. (Raxo annual report, 2004) They are responsible for the purchase of the materials, the setting of the price and the sales of their products. The subsidiaries are operating as autonomous merchants.

(20)

The Transfer Pricing Method of a Multinational

19

2.2.5 Transfer pricing at Raxo

As was said in chapter 1, the transfer pricing method used by Raxo is based on the method that was in place when they acquired the subsidiaries in 2003.

The headquarters provide services to the subsidiaries. The previous sections talked about the activities performed by the headquarters for the benefit of the subsidiaries. Raxo incurs costs by providing these services. An allocation process is used to determine which subsidiary is responsible for what amount of the costs. A fixed mark-up is used to come to an arm's length price and the subsidiaries are charged. The focus of the current transfer pricing method of Raxo is on compliance with the transfer pricing regulations. The current transfer pricing method is not used to decrease overall company tax. During interviews with financial managers of the headquarters, it was said that Raxo does attempt to allocate the costs of the services to the users of the service. This is done primarily for fairness to the subsidiaries, and is not used in the performance evaluation of the subsidiaries. The headquarters does look at the performances of the subsidiaries, but there is no active policy of reward or incentives for the subsidiaries or their managers. Performance of the subsidiaries is measured in EBIT. For Raxo this means that the performance is measured before the charge of the transfer prices. Therefore, the performance evaluation of the subsidiaries is not affected by the transfer price.

The transfer pricing method of Raxo will be discussed in more detail in chapter 4.

2.3 Transfer pricing

There are several definitions for transfer pricing that are being used. As was explained in chapter 1, in this thesis the focus is on the transfer pricing of a multinational, between the headquarters and the subsidiaries in various countries. Therefore, when transfer pricing is defined in this thesis it has to be taken into account that it is transfer pricing between the headquarter and the subsidiaries of the same international and that the subsidiaries are in different countries.

In this light, the definition of M. Przysuski will be used.

Transfer prices are prices that are set between related entities within a multinational group in different tax jurisdictions, when they transact in tangible goods, intangibles or services. (Przysuski, 2005, p20)

The best way to explain transfer pricing is by the use of an example. A visualization of the example is provided in figure 5, after the example.

(21)

The Transfer Pricing Method of a Multinational

20 Example: The transfer pricing process.

In the example, a multinational enterprise (MNE) has its headquarters in the Netherlands and has a subsidiary in Germany. The MNE has its marketing department centralized at the headquarters and they have put in place a marketing campaign in the German market, beneficial for the German subsidiary. This means that the German subsidiary has received services, in the form of a

marketing campaign, from the headquarters in the Netherlands.

For these services, the subsidiary pays a price to the headquarters. This is called the transfer price. The transfer price will shift money from the subsidiary to the headquarters.

The headquarters, as well as the subsidiary are paying taxes over their profits to the tax

authorities in respectively the Netherlands and Germany. The taxable income (amount on which taxes need to be paid), is called the tax-base. In this case the payment of the transfer price shifted income from the German subsidiary to the Dutch Headquarters. This will cause a decrease in the tax-base of the German subsidiary and an increase in the tax-base of the Dutch headquarters. This means that the amount of taxes paid in Germany will decrease and the amount of taxes paid in the Netherlands will increase. Transfer pricing shifts taxable income away from or into countries, which explains why the tax authorities have such high interest in the subject of transfer pricing.

Figure 5: Example of Transfer Pricing Headquarters + $ + Tax-base Subsidiary MNE Services Transfer price

$

Netherlands Tax authority Germany Tax authority

The Netherlands

Germany

- $

(22)

The Transfer Pricing Method of a Multinational

21

If the tax rates in Germany and the Netherlands are the same, the total amount of taxes paid by the MNE will not change. The transfer price will shift a portion of the income to another country. This will result in an increase in taxes paid in the country where the income is going to, but the same amount of taxes paid will decrease in the country where the income came from.

If, however, the tax rates in the countries are not the same, the shift of income will make a difference in the total amount of taxes paid by the MNE. If the MNE can shift income from a country with a high tax rate into a country with a low tax rate, the total amount of taxes paid by the MNE will decrease.Also, when the german fiscal authority would disagree with the transfer price, they could refuse the shift of income and treat the income of the german subsidiary as if the transfer pricing did not take place. If at the same time the dutch fiscal authority demands a transfer price, because they feel a service was delivered, they can treat the income of the dutch headquarters as if the payment did happen. This will result in the payment of double taxation for the MNE. This will be further explained in section 3.3.3.

In the example above, different parties were influenced by transfer pricing. This example focuses on the shift of money and the possible shift in taxes paid. Many other issues play a role in the transfer pricing process. In the next sections the parties involved and the issues involed are discussed.

2.4 Multinational enterprises

For a multinational enterprise, three issues are important with respect to transfer pricing. Tax

Transfer pricing influences the overall amount of tax paid by the MNE. Compliance

Transfer pricing regulations are in place that have to be complied with by the MNE. Performance and control

Transfer prices can influence the performance of the entities of the MNE entities. These issues will be discussed in the following sections.

2.4.1 Tax

A multinational enterprise operates in multiple tax jurisdictions, facing multiple tax rates for company income. The overall income tax for the MNE is determined by the corporate income earned in the various tax jurisdictions. When a MNE earns most of its income in tax jurisdictions with a high tax rate, the overall income tax of the MNE will be high. The opposite counts when most of the profits are earned in jurisdictions with a low tax rate. It can be profitable for a MNE to shift income from a country with a

(23)

The Transfer Pricing Method of a Multinational

22 high tax rate to a country with a low tax rate. When only the transfer pricing perspective is considered, this will lower its total taxes paid and increases total after tax profit of the MNE.

An MNE with multiple subsidiaries in various countries many times has a subsidiary that has off-settable losses. It could be profitable to shift income from a subsidiary without off-settable losses to the

subsidiary with off-settable losses.

Tax authorities will lose income if income is shifted away from their jurisdiction. Therefore, they will have regulations on how income should be shifted between members of the MNE. This will be discussed in section 2.5.

2.4.2 Compliance

However, the MNE cannot freely set its transfer prices at a level that it sees best. Tax authorities have regulation on transfer pricing in place to ensure that an appropriate portion of the overall corporate income of the MNE is received. (tax authorities and regulations will be further discussed in section 2.4) For a MNE this means that it would need to have a transfer pricing method in place that is in compliance with the regulations of the various tax authorities. When regulations are not met, the MNE could face penalties or a forced adjustment of the tax base by the tax authorities. The adjustment of the tax base could result in payment of double taxation. (the issue of double taxation is further explained in section 3.3.3)

The MNE can minimize the risk of penalties or adjustment of the tax base by setting its transfer prices at arm’s length and have proper documentation to show that it complies with the arm’s length principle.

2.4.3 Performance and control

Besides the issue of compliance, there is also the issue of performance and control. Many MNEs have some kind of performance measurement in place to evaluate the performance of the different entities within the MNE. Transfer pricing influences the cost, income and therefore profitability of the members of the MNE. When the performance of a subsidiary is considered, it should be taken into account that the profit of that subsidiary is influenced by transfer pricing.

When a MNE uses performance evaluation, it is important that the input for the evaluation is a true representation of the performance. For instance, the profit of an entity is influenced by the transfer price, as shown in the example above. If the performance of an entity is measured by the profit generated by that entity, the transfer price influences the performance. Therefore, applying the right transfer price is also necessary for a correct performance evaluation.

When a subsidiary pays a transfer price to the headquarters, it lowers the profits of the subsidiary. When a subsidiary's performance is evaluated in terms of profits, the performance would be better with a low

(24)

The Transfer Pricing Method of a Multinational

23 transfer price. Therefore, it can be assumed that even if it would be profitable for the MNE as a whole, the subsidiary could be hesitant to let income shift away from it.

2.5 Tax authorities

Tax authorities set the tax rates within their tax jurisdiction. MNE’s will pay taxes in the amount of their taxable income (the tax base) multiplied by the tax rate. Because a MNE operates in multiple tax

jurisdictions, the difficulty arises what portion of the total tax-base should be taken into account within each tax jurisdiction.

Tax authorities have transfer pricing legislation in place to assure their appropriate portion of the total income tax of the MNE. For example, the transfer pricing legislation can specify which costs can or cannot be included in transfer pricing. It can also specify different methods that they find acceptable to come to a reliable transfer price.

The transfer pricing guidelines set up by the Organisation for Economic Co-operation and Development (OECD), which will be discussed in the next section (2.6), often are applied as guidelines for

determining transfer prices; both by MNEs and tax authorities. The tax authorities and how they use the guidelines will also be discussed in more detail in section 3.2.

When independent companies make transactions, market forces determine the price of a transfer. (OECD Transfer Pricing Guidelines, 2001, 2.1) When members within a MNE conduct transactions, market forces don’t play the same role, which can affect the price of the transfer. As was shown in section 2.3, the way the transfer price is set influences the tax-base in the jurisdictions. A lower tax-base for an entity of the MNE in a tax jurisdiction means a lower income for that jurisdiction. Therefore the tax authorities look at transfer pricing with great interest and make sure that their appropriate portion of the overall corporate income tax of the MNE is ensured.

2.6 The OECD

The Organisation for Economic Co-operation and Development (OECD) groups 30 member countries including most of the countries of the European Union. (See Annex E) The organisation aims to improve policy and implement instruments on a wide variety of economic, social and governance issues. It produces instruments, decisions and recommendations that can lead to formal agreements or treaties. (Website OECD, 2006) One area the OECD has been active in is the issue of transfer pricing.

In 1979 the OECD released the guidelines on cross-border transfer pricing and in 1995 a revised version was issued: Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

(25)

The Transfer Pricing Method of a Multinational

24 The OECD guidelines address the transfer pricing issue and focus on determining the income and

expenses of an entity within a MNE that should be taken into account within a tax jurisdiction.(OECD Transfer Pricing Guidelines, 2001, 2.14) The guidelines are advisory and not enforceable as such. They can become enforceable if they are adopted by tax authorities and made into law, or are referred to in treaties between countries. They form a basis for many of the tax treaties and legislation of tax authorities world-wide. (OECD Transfer Pricing Guidelines, 2001)

The OECD Model Tax Convention serves as a model used by countries for negotiation, application and interpretation of bilateral tax treaties, of which there are now more than 2500 in force around the world. The Convention consists of Articles, Commentaries on the Articles that include OECD member country reservations, histories of the articles, non-member country positions on the articles, and special reports related to the convention. (Website OECD, 2006)

(26)

The Transfer Pricing Method of a Multinational

25

Chapter 3

The transfer pricing method

3.1 Introduction

The previous chapter explained the importance of the setting of transfer prices for the different parties involved. In order to make recommendations for the transfer pricing method used by Raxo, the issues related to a transfer pricing method have to be looked at in more detail.

As was mentioned in chapter 1;

the transfer pricing method is the process of determining: i) What services are rendered that can be charged with a fee?

ii) The cost allocation. Who are the users of the service? Which users benefit from the services provided and what proportion of the costs of the services should be charged to them? iii) What is the fee that should be charged?

As mentioned in chapter 2, there are regulations put in place by tax authorities. A MNE operates in multiple countries and has to comply to all the regulations of the tax authorities involved. Often, by determining the transfer price, the transfer pricing guidelines of the OECD are used by both the multinational as well as the tax authorities. Therefore, the issues mentioned above will be discussed on the basis of the OECD guidelines.

First, some of the differences between tax authorities and regulations will be explained. Next, the most important issues of the OECD guidelines will be discussed. In the following sections, it will be explained how it is determined what services are provided, followed by the issue of allocation of the costs. Last it is shown how to determine the amount of the fee that should be charged.

3.2 Tax authorities and regulations

As mentioned in chapter 2, there are regulations put in place by tax authorities. A MNE operates in multiple countries and has to comply to all the regulations of the tax authorities involved. As was mentioned in section 1.7, the complete system of fiscal regulations for each country is to comprehensive to discuss in this thesis. However, some of the differences between countries with respect to transfer pricing regulations will be discussed in this section.

Often, by determining the transfer price, the transfer pricing guidelines of the OECD are used by both the multinational as well as the tax authorities. However, there are important differences in the tax legislation of countries.

(27)

The Transfer Pricing Method of a Multinational

26 Three groups, with different legislation will be discussed below.

1. Some countries such as the United States, Canada and Germany, have detailed transfer pricing legislation.

2. Some countries such as the Netherlands, don’t have the detailed legislation. They apply open norms determining that the transfer price should be arm’s length, without indicating which methods should be applied to determine the arm’s length price.

3. Some countries don’t have any transfer pricing legislation at all. However, just because they don’t have legislation does not mean that by determining the transfer prices, they will not make use of the OECD guidelines or its principles.

Even if a country has no legislation in place, it could be useful for a multinational to follow the OECD guidelines. First, if they use the OECD guidelines for determining the transfer prices in other countries, it will show consistency in their method of determining the transfer prices. Second, by following the OECD guidelines for determining the transfer prices, they will make an effort to apply arm’s length transfer prices. Both points mentioned above will help the MNE demonstrate to the tax authorities that they applied the transfer prices consistently and correctly.

The guidelines will be discussed below.

3.3 The Transfer Pricing Guidelines

As explained in the previous chapter, the transfer pricing guidelines, issued by the OECD, often used as guidelines for the determination of transfer prices. The guidelines hold 262 pages and can be viewed at the website of the OECD. The guidelines include lines of action for the transaction of goods and services. As mentioned in chapter 1, the focus of this research will be on services. The subject of transfer pricing of services is discussed separately in chapter 7 of the guidelines: Special Considerations for Intra-group Services.

3.3.1 Separate entity approach to transfer pricing

One of the main issues of transfer pricing is to determine the tax liability of a MNE in each jurisdiction that the MNE operates in. The guidelines use the separate entity approach to determine the tax liability in each jurisdiction. The separate entity approach treats the related entities of a MNE as separate unrelated entities. This approach says that the different entities of the MNE should be taxed on the basis that they are dealing with each other as non-related entities. Therefore, the transfer prices between entities should be priced on the basis that they are non-related entities. This is known as the arm’s length transfer price, explained in more detail in the next section.

(28)

The Transfer Pricing Method of a Multinational

27

3.3.2 Arm’s length transfer price

For the arm’s length transfer price the guidelines refer 1979 OECD Report. In this report, the arm´s length price is defined as:

The price, which would have been agreed upon between unrelated parties engaged in the same or similar transaction under the same or similar conditions in the open market. (OECD Report, 1979)

The arm’s length price is the basis for treaties between OECD countries, and also many non-OECD countries. (Neighbour, 2002) Most of the tax authorities in the world have adopted the arm’s length price as the accepted transfer price for intra-group transactions.

The arm’s length transfer price is the price that non-related parties would ask for their goods or services. This will ensure the tax authorities the right proportions of the corporate tax in their tax-jurisdictions. For the MNE this is a requirement that has to be met and should be their basis for the setting of the transfer price.

3.3.3 Double taxation

The previous section showed that OECD members have agreed upon the arm’s length transfer price as the appropriate transfer price for tax purposes. To ensure the use of the arm’s length principle, tax authorities have regulations in place, based on Article 9 of the OECD Model Tax Convention. This allows tax jurisdictions to adjust the transfer price used by related parties when they conclude that the transfer price is not at arm’s length.

Article 9 of the Model Tax Convention holds:

"[When] conditions are made or imposed between ... two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly."

(Article 9 of the Model Tax Convention is added in Annex D)

This means that transactions of goods and services between dependent companies should be priced at arm's length. When a tax authority can show that the transfer prices were not set at the appropriate level, or the costs were unjustly allocated to their jurisdiction, they can adjust the tax-base to reflect the right transfer price or costs. This adjustment results in a higher tax for the MNE. When this adjustment is not off-set in another jurisdiction, the result is that it will pay income tax twice over the amount of the adjustment.

(29)

The Transfer Pricing Method of a Multinational

28

3.4 Determination of the services provided

The guidelines describe when a service can be charged as an intra-group service to other members of the group. It describes the conditions that have to be met for a service to have been rendered. Even if an organisation calls activities services, they can only be charged as such when these conditions have been met.

If the service has been rendered depends on whether the activity provides a group member with

economic or commercial value to enhance its commercial position. This means that the service has been rendered if an independent company (not related to the MNE) would have paid for the service or would have performed the service itself.

Below are some examples of activities that an independent company would not be likely to pay for. Shareholder activities

Duplication of a service Incidental benefit

Also, special consideration has to be made for the provision of services that are available at all times: On call services

These activities will be described below.

3.4.1 Shareholder activities

Costs that are incurred for the sole benefit of the shareholder should not be charged to other members in the group. (OECD Transfer Pricing Guidelines, 2001)

The following examples constitute shareholder activities

a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of

shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board;

b) Costs relating to reporting requirements of the parent company including the consolidation of reports; c) Costs of raising funds for the acquisition of its participations.

Costs resulting from activities resulting from the responsibility for the shareholder will not be allocated to the group. For example, producing consolidated accounts for the shareholder, or when activities are performed in order to preserve equity investment in a subsidiary.

(30)

The Transfer Pricing Method of a Multinational

29

3.4.2 Duplication of a service

Services of a duplicate nature are services performed that are already performed by a subsidiary. In some cases there may be a valid business reason, which can justify the service to be duplicated. A justification of duplicate services can be the reducing of risk, where a second legal advice is asked to reduce the risk of a harmful business decision, or when the duplication is for good business reasons and temporary. For example, when computer applications are changed, there could be a valid reason to run two applications for a period of time.

When there is no justification for a duplication of the service, the service cannot be considered rendered and there should be no charge to the entities.

3.4.3 Incidental Benefits

When an activity is performed for one or more group members, the possibility exists hat other members of the group will have incidental benefits. For example, when an advertisement campaign is aimed for the German market, there is a chance that the Austrian market will have some incidental benefit from that campaign. However, this does not constitute as a service performed for the Austrian market, because an independent Austrian company would never have paid for an advertisement campaign in Germany. There should not be a charge for incidental benefits.

3.4.4 On call services

On call services are services that are available at any time. Many MNE’s have services on-call in the form of assistance with regard to legal, finance, human resource, technical or tax issues. In this case there are two costs of the provision of service; first the costs of having the service available at any time, second the costs of the actual service provided. Costs of the actual service provided need to be charged to the group member who benefits from the service. The question arises if a charge is justified for having the services available at any time.

An intra-group service would exist to the extent that it would be reasonable to expect an independent enterprise in comparable circumstances to incur "standby" charges to ensure the availability of the services when the need for them arises. (OECD Transfer Pricing Guidelines, 2001) If the need for the

service is remote or if it could easily be obtained from other sources without the service needing to be on call, a charge is unjustified. (Mehta, 2005)

(31)

The Transfer Pricing Method of a Multinational

30 Other activities that an independent company would have been willing to pay for, or would have

performed itself, will be considered intra-group services. They may include:

Administrative services

(planning, coordination, budgetary control, financial advice, accounting, auditing, legal, factoring, computer services)

Financial services

(supervision of cash flows and solvency, capital increases, loan contracts, management of interest and exchange rate risks, and refinancing; assistance in the fields of production, buying, distribution and marketing)

Services in staff matters (recruitment and training)

These types of activities ordinarily will be considered intra-group services because they are the type of activities that independent enterprises would have been willing to pay for or to perform for themselves. (OECD Transfer Pricing Guidelines, 2001)

3.5 Determining the allocation of the costs

Once it is determined what services are provided, and can be charged to other members of the group, it should be determined how to allocate these costs. It has to be determined who are the users of the service provided. In some cases the costs of the services are easily identifiable. For example, when a project is done during some period of time for a specific member of the group, the costs of the service is easily identifiable, being the total cost of the project. Here, the direct method can be used to determine the allocation of the costs. In some cases the costs are not easily identifiable. For example, some of the overhead cost should be included in the provision of services. How much of the overhead was needed to provide which services is not easily identifiable. Here, the indirect method has to be used to determine the allocation of the costs.

These two methods will be described in more detail below.

3.5.1 Direct versus indirect method

Direct charge method

The direct charge method is a method of charging directly for specific intra-group services on a clearly identified basis. (OECD Transfer Pricing Guidelines, 2001) It can be used when the costs of a specific service rendered are easily identifiable for the user of the service. When no further allocation method is needed to identify the costs for a specific user the direct method is used.

(32)

The Transfer Pricing Method of a Multinational

31 Indirect-charge method

The indirect-charge method is a method of charging for intra-group services based upon cost allocation and apportionment methods. (OECD Transfer Pricing Guidelines, 2001) This method is used when costs of a service rendered are not easily identifiable or the costs are incorporated into other transactions between the companies.

By using the indirect charge method, it is important that the right apportionment method is used. In many cases an allocation key is needed to allocate the costs to the user of the service. The allocation key should reflect the benefit received from the service provided.

Because the allocation key is one of the elements that determine the transfer price, it is important to choose it with care. In chapter 4, the allocation key is discussed in more detail, as the allocation key for Raxo is discussed.

3.6 Determining the transfer price

Once it is determined what services are provided and who the users of those services are, it has to be determine the transfer price that has to be charged for the services. Most of the regulations of the tax authorities state that by the determination of the transfer price, one of the pricing methods given by the OECD guidelines have to be followed. The OECD guidelines have issued six methods that can be used in order to determine the arm’s length price of a transaction. The methods and how to choose the right method will be discussed below.

3.6.1 Transfer pricing methods

The guidelines discuss six pricing methods that can be classified in two categories: i. the traditional transfer pricing methods

ii. the transactional profit methods

For more details on the methods, see OECD Transfer Pricing Guidelines, chapter 2. These methods will be discussed below.

(33)

The Transfer Pricing Method of a Multinational

32 I) Traditional transfer pricing methods:

Comparable uncontrolled price (CUP) method

The CUP method compares the price charged for goods or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction that has comparable circumstances.

If there is a difference in price, it could mean that the controlled transaction is not at arm’s length. A controlled and uncontrolled transaction can be compared

i. if the circumstances are similar,

ii. if the difference in circumstances has no material affect on the price,

iii. if reasonable accurate adjustments can be made to account for the difference.

If there are differences in the circumstances depends on the comparability of the controlled and uncontrolled transaction.

Factors determining comparability are:

(i) the characteristics of the property or services transferred,

(ii) the functions performed taking into account the assets used and risks assumed, (iii) the contractual terms,

(iv) the economic circumstances of the parties and

(v) the business strategies pursued by the parties

(Draft secretariat, 2004)

The resale price method

This method begins with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin (the "resale price margin") representing the amount out of which the reseller would seek to cover its selling and other operating expenses and make an appropriate profit. What is left after subtracting the gross margin can be regarded as an arm's length price for the original transfer of property between the associated enterprises.

The cost-plus method

The cost-plus method begins with the costs incurred by the supplier of property or services in a controlled transaction for property transferred or services provided to a related purchaser.

(34)

The Transfer Pricing Method of a Multinational

33 Depending on the service provided, an appropriate cost-plus mark-up is then added to the costs. This cost-plus mark-up is added to reflect an appropriate profit considering the functions performed and the market conditions. The cost-plus mark-up should be comparable to what independent companies would have agreed upon. Therefore, when the mark-up is added, the transfer price should be the arm’s length price of the transaction.

II) Transactional profit methods: The profit split method

The profit split method first identifies the profit to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. The transactional net margin method (TNMM)

The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction. The net margin of the taxpayer from the controlled transaction should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions.

3.6.2 Choosing a method

When choosing a method to apply the right transfer price, it is important to consider that the OECD and the tax authorities prefer some methods over others. The preferred method is the method that has the most direct means of establishing the arm's length price.

This means that the traditional methods are preferred over transactional methods. The OECD writes in the guidelines:

Traditional transaction methods are the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm's length. As a result,

traditional transaction methods are preferable to other methods. (OECD Transfer Pricing Guidelines,

(35)

The Transfer Pricing Method of a Multinational

34 Of the three traditional methods, the CUP method is preferred:

Where it is possible to locate comparable uncontrolled transactions, the CUP Method is the most direct and reliable way to apply the arm's length principle. (OECD Transfer Pricing Guidelines, 2001, 2.7)

Therefore, there is a hierarchy in choosing the right method. First, traditional methods should be chosen, preferably the CUP method. When the CUP method is not applicable, because there is no uncontrolled comparable transaction, the resale price method or cost plus method should be chosen. Only when the circumstances do not allow the use of the traditional methods, one of the transactional methods should be chosen.

3.7 Conclusions

In the previous sections the issues involved in the transfer pricing method were discussed. The previous sections can be seen as the steps in a transfer pricing method. These steps are visualised in figure 6, below. The roman numerals on the right side of the figure correspond with the steps discussed after the figure.

No charge Direct charge Indirect charge I

Allocation keys II

Transfer pricing

m ethod Transfer pricing m ethod III

Transfer price Transfer price

Activities

(36)

The Transfer Pricing Method of a Multinational

35 The steps of the transfer pricing method (see figure 6)

I: Can the activity be considered rendered? No charge and no transfer price is charged when it is determined that a service was not rendered. A direct or indirect charge is used when it is determined that a service has been rendered.

II: For an indirect charge allocation keys are used to determine the right charge.

III: One of the methods of the OECD guidelines is used to determine the transfer price for the activity performed.

This can be used in the next chapter where the transfer pricing method for Raxo headquarters is reviewed and recommendations are given for the method.

Referenties

GERELATEERDE DOCUMENTEN

According to the framework of preferred customership, customer attractiveness is the first cornerstone of the virtuous circle of preferred customer status presented in Figure 1.

This study concludes that it is certain that the BEPS regulation increased the overall transparency and guidance in terms of its implementation, by splitting the transfer pricing

The OECD Transfer Pricing Guidelines (2010) corroborate the difficulty to gather sufficient information to verify an arm’s length price, but state that it is the best theory available

As the strategic objectives of dynamic pricing strategies are interrelated with the broader objectives of the organization, and learning is an important aspect of dynamic pricing,

Based on the previous chapter a cost-based transfer pricing method is the most adequate solution for the transfer pricing problem within the Martini Hospital. However, a

76 OECD (2009a) Transfer pricing guidelines for multinational enterprises and tax administrations, Parijs, par.. De markt waarin onderneming X opereert bevindt zich in Europa. Er

De Engelse Belastingdienst kan dus een boekenonderzoek instellen en daarbij gebruik maken van gegevens die zes jaar voor het doen van aangifte bekend zijn. Indien een

1 Fiscus controleert multinationals in Nederland scherp, Het Financiële Dagblad, 14 december 2007. 2 Fiscus legt lat bij multinationals steeds hoger, Het Financiële Dagblad,