Erasmus Transfer Pricing Institute is a knowledge center for education and research in the field of transfer pricing. Since transfer pricing is of great importance, ETPI offers the Executive Program Transfer Pricing for professionals who want to deepen their knowledge of transfer pricing. The program consists of five modules each discussing an important topic related to transfer pricing. In addition, ETPI publishes articles related to the latest developments in the field of transfer pricing.
Importance of transfer pricing
Transactions between entities of the same multinational enterprise (“MNE”) group constitute a large part of global trade, approximately 60% in total. Doing transfer pricing, which is the pricing of intercompany transactions between group entities, is therefore necessary to allocate profits to the group entities in the various countries. Transfer pricing affects the taxable profits of MNE group entities and hence the tax revenues of the respective tax jurisdictions. For tax purposes, countries have agreed that transfer prices in relation to related party transactions should comply with the arm's length principle. Disagreement with tax authorities on what constitute an arm's length transfer price, can lead to long and costly tax audits, significant tax adjustments, double taxation, penalties or reputation damage. Therefore, setting an arm's length transfer price is of great importance. Furthermore, a thorough implementation and its control mechanisms are indispensable, as well as clear transfer pricing (dispute) management.
It is therefore of no surprise that transfer pricing is one of the most important and challenging international tax issues facing large MNE groups as well as small and medium-sized MNE groups. The topic of transfer pricing has attracted the attention of various internal stakeholders within an MNE group, such as the finance & control department, the board and the legal department, in addition to the tax department. External stakeholders (e.g. tax authorities, external auditors, the European Commission and non- governmental organizations) are increasingly interested in the transfer pricing policies of multinational enterprises as well.
The importance of applying arm’s length transfer prices and the management and control of transfer pricing risks have increased in recent years following the OECD Base Erosion and Profit Shifting project which has led to revised transfer pricing standards and supplementary documentation requirement. The fiscal and financial positions of multinational enterprises are therefore served with the correct application of the relevant laws and regulations, in which the connection with the economic reality is also of great importance.