Transfer pricing

Transfer pricing: tax and economy

Transfer pricing is at the border between tax and economy. This is an issue. There is a company manufacturing a good and distributing it to company B. So company A purchases raw materials and company B resells finished products to the final consumer. There is a market price that is the first price of company A, and the price of company B isn’t a market price.

Sale of goods price

What is the sale of goods price? The problem is how tax legislation regulates the price applied by the parts that operate in lots of countries, in order to have benefits in their consolidated base. If the manufacturing company is in a high tax area and instead the distribution company is in a low tax area, the setting of the price in the first is set at a very low price and after in the second is low.

Arm’s length principle (ALP)

The arm’s length principle (ALP) is the market price set worldwide by legislation. The legal base is art. 110 of TUIR and art. 9 of the TUIR. Apart from this, there are also regulations and circulars that regulate it.

Art. 110 of TUIR

Art. 110 par. 7 of TUIR is about business income of a resident enterprise arising from transactions with non-residents that, either directly or indirectly, exercise a dominant influence; also from transactions where the resident enterprise controls non-resident companies and from transactions between resident and non-resident companies that are under the common control of a third company. It is assessed on the basis of the normal value of the goods transferred, services rendered, or services if an increase in taxable income derives therefrom. The provision also applies if a decrease in taxable income derives therefrom, but only if the mutual agreement procedure provided in double tax treaties is used. This is basic internationally.

Notion of control

DE jure control: art. 2359 c.c. explains what control means. In facto control. A Supreme Court decision says something about control, released in April 2016: the concept of control must be extended to all hypotheses of economic influence, whether currently effective or potential, that may be inferred from the single circumstances.

The principle of art. 110 TUIR has objective requirements: business income includes revenues, losses, gains, etc., arising from the transfer of goods, transfer of shares, provision of services, loans, business restructuring, licensing.

Art. 9 of TUIR

Definition of normal value: average price or consideration paid for goods and services of the same or similar type, carried on at market conditions and at the same level of business, at the time and place in which the goods were purchased or the service was performed.

Determination of the normal value

Reference should be made to the extent possible to the price list of the provider of goods or services. In the absence of the provider’s price list, reference should be made accordingly.