Advantages And Disadvantages Of Transfer Mispricing

MANIPULATION OF TRANSFER PRICING

Transfer pricing is not, in itself, illegal or necessarily abusive . What is illegal or abusive is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing. Transfer mispricing is a form of a more general phenomenon known as trade mispricing, which includes trade between unrelated or apparently unrelated parties.

Transfer pricing thus provides for huge loss to the public exchequer as they are prevented from taxing a product or service or on the other hand are prevented from realizing the real tax at which a product was to be taxed in a country. Transfer pricing manipulation reduces revenue available for country development, and with increasing globalisation, the potential

It also requires that an appropriate “corresponding adjustment” be made by the other Contracting State in such cases to avoid economic double taxation, if justified in principle and in amount. In other words, if one country increases the profit attributed to one side of the transaction, the other country should reduce the profit attributed to the other side of the transaction. The Competent Authorities of the Contracting States are if necessary to consult with each other in determining the

The transfer price chosen for management purposes does not simply duplicate the transfer price chosen in a tax‐free world. The differential between low‐tax and high‐tax countries where the involved business units are located shows an indirect influence on the choice of the incentive transfer price as the incentive transfer price will determine the size of business activity in the involved jurisdictions which themselves are taxed according to the tax‐only transfer price. Against this background it has been proposed that the optimal transfer price for business purposes will be “a weighted average of the pre‐tax marginal cost and the most favourable arm’s length