An Intro To Transfer Pricing

The following article was written for the Malaysian Corporate Counsel Association (MCCA) and is currently being published in its official website www.mcca.com.my. The author, Zachary Lau is also the current Deputy President of the MCCA.

Transfer Pricing (TP) is a term that reveals little, but requires much an attention from MNCs and governments. This brief article attempts to examine some of the macro concepts underlying the TP framework.

TP impacts the pricing of goods, services and intangibles given for consumption or use to a related party (e.g. a subsidiary).

The category of pricing falling within the ambit of the TP framework can be either market-based, i.e. equivalent to the prevailing market price, or non-market based. The pricing objectives could be internal (e.g. the placement of a price on imported inputs) or, external (e.g. tariffs or taxes) [Source: Mayank K Agrawal, Transfer Pricing A Beginner's Perspective]

In an increasingly global economy, in which sourcing, manufacturing and consumption of goods takes place in different jurisdictions in order to reduce operational costs, the cross-border transactional pricing of goods, services and intangibles is a key focus area for MNC’s in determining the structure of groups of companies to be located all over the world. Obviously, it would be in the best interests of the MNC to familiarize itself with the TP guildelines of their host and home countries, in order to maximize benefits.

There is however, a fine line between maximizing benefits and outright manipulation, the potential for which has been of concern to the international community for some time. Manipulative practices could comprise, for example, the fixing of transfer prices on a non-market basis instead of in line with the dynamics of market forces, resulting in tax savings accruing to the MNC by virtue of deliberate movement of its accounting profits/taxable revenue from a jurisdiction in which taxes are high, to a jurisdiction in which taxes are low.

Such movement of taxable revenue would result in a distortion in Balance of Payments between the host and home country, and would impact the home country’s attractiveness towards Foreign Direct Investment (FDI). [Source: Mayank K Agrawal, Transfer Pricing A Beginner's Perspective]. The impact of such a practice would be to render some Asian countries such as Hong Kong and Singapore which have no TP controls, more attractive as FDI destinations than countries such as Malaysia, in which the TP framework is fairly restrictive.

For more information on TP, please visit the official website of the Inland Revenue Board of Malaysia.