Transfer Pricing

December 2001

International tax planning structures often need to consider transfer pricing as part of the decision making process. This is a direct result of many countries introducing specific transfer pricing legislation and/or guidelines to ensure their tax base is not eroded.

In basic terms, transfer pricing is the pricing for goods and services between two (or more) related parties. Goods and services include tangible property, management services, funding, royalties and anything else. The consideration for these goods and services can be manipulated to effectively “shift” the profit on the transaction to a jurisdiction which has low tax rates. It is not difficult to conclude that without proper planning, the transfer pricing risk on any proposed international tax planning structure will be increased. This may result in a re-assessment of tax in one or a number of countries as well as penalties.

Jurisdictions who have introduced transfer pricing legislation and/or guidelines specify the consideration charged for the goods and services transferred should be at an arm’s length rate, i.e the consideration that third party would pay for the goods and services. To evidence that the prices are at arm’s length it is necessary to prepare transfer pricing documentation. Transfer pricing documentation will also reduce the transfer pricing risk profile which in turn should reduce penalties in the event of any re-assessment of tax.

As a further point, organisations either using or considering setting up e-commerce structures should also consider transfer pricing planning. As the OECD is presently in the process of discussing permanent establishment issues regarding e-commerce, now is a good time to take advantage of the potential vacuum.

Any transfer pricing issues will depend on the facts and circumstances of the proposed structure. With its advantageous regime, the British Virgin Islands is perfectly placed to help clients properly plan for transfer pricing. We would be happy to discuss any transfer pricing issues with you.

For more information please contact us.