What are transfer prices?
They are the values assigned to transactions between companies that have an economic relationship or link because they belong to the same economic group but are located in different tax jurisdictions, whether for the transfer of tangible or intangible goods or for the provision of services. These transactions, not being between independent parties, can be used to manipulate prices in order to reduce the tax burden, either by undervaluing income in countries with high tax rates or by overvaluing expenses in countries with lower tax rates.
2. What is the Arm's Length Principle?
The Arm's Length Principle is the principle that transactions between related companies must be carried out at the same price that would have been agreed if the transactions were carried out between independent parties. This principle is essential to determine the correct taxable amount.
When the tax administration determines that the prices filed do not reflect the market value, it can make adjustments using various transfer pricing methods.
3. What is the objective of transfer pricing rules?
It is to ensure that transactions between related parties are valued as if they had been carried out between independent parties, applying the arm's length principle.
4. What methods are used to establish transfer prices?
The methods recognized in article 32°-A of the Income Tax Law to establish transfer prices are the following:
Comparable Uncontrolled Price (CUP) Method: It compares the price of a controlled transaction with the price of a comparable transaction between independent parties.
Resale Price Method: Based on the price at which a product purchased from a related party is resold to an independent party.
Cost Plus Method: Calculated by adding a mark-up to the cost of production of goods or services acquired from a related party.
Transactional Profit Split Method: Divides the profits obtained from a joint operation between related parties in proportion to their contributions.
Transactional Net Margin Method (TNMM): Analyses the profitability obtained by the analyzed party based on certain indicators, such as the operating margin.
Other methods.