Tax aspects of transfer pricing – The global tax system is currently based on a “separate entity” principle. Under this principle, every entity is considered a separate independent taxpayer by local tax authorities. As a result, the taxable profits of every entity within an Multinational Enterprise (MNE) group should be determined on a standalone basis. As transfer pricing is an instrument that allows profit to be shifted from one entity to another, national tax authorities are suspicious of the transfer pricing practice of MNEs and the related possibilities for manipulating taxable profits in their jurisdictions.
In conjunction with this trend, there has been an increase in transfer pricing scrutiny by the tax authorities and other governing bodies (e.g., General Department of Customs and Excise, General Department of Taxation, etc.), especially during the tax audit process. As a result, they have been strictly required to have the supporting transfer pricing documentation in place and will be imposed penalties for non-compliance.
