Transfer Pricing

  • March, 2025
  • Blog

Today's highly globalized world, especially in the business sector, enables a range of previously extremely complex solutions for entrepreneurs, if not impossible; the opportunity to relocate businesses to one or more countries, in order to make the best use of regulations, bureaucracy, taxation and individual markets, thus maximising profits, it is an increasingly widespread and essential practice in the modern real economy.

Of course, Delocalisation processes and the creation of transactional corporate structures present not only undoubted advantages, but also potential risks, and in the same way they can lend themselves to a series of illicit practices, in violation of free competition and in many cases also of the tax legislation of individual countries.

Faced with these risks, many States have taken action to ensure control and equalisation of situations., in order to avoid damage to competition between companies and potential actions aimed at circumventing tax regulations.

Knowing not only the internationalization strategies and the options in terms of corporate structures, but also the regulations and forms of control that certain countries have on these processes, is essential to ensure correct planning of your business. without incurring, even in good faith, administrative and/or fiscal offences.

What is Transfer Pricing?

Among these regulations, it is certainly important to know the topic of the so-called "transfer pricing".

This term refers to, Meaning what, ai "Transfer prices" of goods and services between companies located in different countries but all part of the same corporate group. In short, it's about everyone"the income components deriving from transactions with companies not resident in the territory of the State, which directly or indirectly control the company, are controlled by it or are controlled by the same company that controls the company".

The reasons why several states have found it necessary to carry out checks on such operations are simple.: the possibility of being able to transfer income components between two companies connected to each other, one based in a given country and the other based in a different country, may give rise to possible violations of competition, but also to the circumvention of tax regulations. The two companies, substantially controlled by the same entity, could in fact agree on a price altered with respect to the market price, both in order to make the purchasing company more competitive on its reference market (being able to purchase at lower prices), and with the potential aim of diverting greater income or deductible costs towards companies based in countries with lower taxation, avoiding in whole or in part the more burdensome taxation of the country of origin and thus obtaining an undue tax saving.

The Calculation Method

Since this is a rather widespread system and relatively simple to use for purposes of fraud against the law, as mentioned, Many States have adopted their own regulations aimed at carrying out the appropriate controls with respect to these types of transfers and also at establishing precise rules and procedures to alternatively identify the real value of the aforementioned operations., so as to avoid the risks identified above.

In general, At European level, the OECD has established precise guidelines for identifying the correct transfer price, which are generally divided into main (or traditional) methods and alternative methods (also called “fourth methods”).

They fall into the first category:

  • The price comparison (i.e. the comparison between the agreed price and the price charged for comparable transactions);
  • The resale price (according to which the value of a good purchased from a related seller for resale to a third party, in particular when it does not require further transformation, is equal to the sale price to the third party less a gross profit margin);
  • The increased cost (used in the case where the product sold between two associated companies requires transformation, and therefore also considers the costs incurred by the producer and the related margin necessary to justify a remuneration for the activity carried out).

Alternative methods include::

  • The distribution of legal profits (the price is determined on the basis of the distribution of the overall profits of the group to which the two companies belong);
  • Profit comparison (the price is calculated assuming the determination of a gross profit for each of the connected companies as a percentage of the turnover and costs incurred);
  • Comparison of the return on invested capital or net margins of transactions (the price is determined by calculating the profit as a percentage of the invested capital, regardless of production and sales costs).

 

Through such control and calculation systems, States seek to prevent abuse perpetrated by companies belonging to the same group., but located in different countries, which could alter competition and erode the tax base, perhaps in favor of the relocation of income to countries with lower or privileged taxation.

Which States Have Transfer Pricing Regulations?

Although, as explained, this is a simple and widespread practice, and therefore well known to international tax authorities, Not all countries have already adopted specific legislation on Transfer Pricing; therefore there are states that do not regulate this specific aspect.

According to OECD data Countries that have their own regulations on Transfer Pricing are:

  • Albania
  • Angola
  • Argentina
  • Australia
  • Austria
  • Belgium
  • Bosnia and Herzegovina
  • Brazil
  • Bulgaria
  • Canada
  • Chile
  • China (People's Republic of)
  • Colombia
  • Costa Rica
  • Croatia
  • Czech Republic
  • Denmark
  • Dominican Republic
  • Egypt
  • Estonia
  • Finland
  • France
  • Georgia
  • Germany
  • Greece
  • Honduras
  • Hungary
  • Iceland
  • India
  • Indonesia
  • Ireland
  • Israel
  • Italy
  • Jamaica
  • Japan
  • Kenya
  • South Korea
  • KosovoNew
  • Latvia
  • Liberia
  • Liechtenstein
  • lithuania
  • Luxembourg
  • Maldives
  • Malaysia
  • Malta
  • Mexico
  • Netherlands
  • New Zealand
  • Nigeria
  • norway
  • Panama
  • Paraguay
  • Papua New Guinea
  • Peru
  • poland
  • Portugal
  • Romania
  • Russian Federation
  • Saudi Arabia
  • Senegal
  • Seychelles
  • Singapore
  • slovak Republic
  • Slovenia
  • South Africa
  • Spain
  • Sri Lanka
  • Sweden
  • Switzerland
  • Tunisia
  • Turkey
  • Ukraine
  • United Kingdom
  • United States
  • Uruguay
  • Vietnam

The importance for tax authorities to ensure the most uniform and widespread application of transfer pricing legislation possible is demonstrated by the enormous efforts made in this direction by both the UN and the OECD, with particular regard to developing countries., in which in recent decades we have been witnessing an ever-increasing investment by foreign countries and private companies that have increased the traffic of goods and services of a transactional nature. For these reasons, The OECD has drawn up guidelines and has been working for years to push these countries to adopt specific transfer pricing legislation, also in order to protect free international competition and investment certainty.

The problem mainly affects these countries because they are affected by an inevitable lack of technical expertise on the subject by professionals and by the lack of tools and means to ensure the application of such regulations. In this sense, the low effectiveness, if not the total absence, of transfer pricing regulations can constitute an obstacle to free competition and alter the rules of the global market.

Discover the fiscal and financial characteristics of different countries with our GV Index.

Discover the Countries

In conclusion

When you want to start or optimize a transactional business strategy, knowing in detail the different national and international regulations aimed at regulating and balancing the different markets of the world is necessary, to avoid errors of assessment and, in extreme cases, sanctions for violations committed even in absolute good faith. Relying on a competent firm, with experience in the field, is an essential solution to make your strategies more effective.

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