TP is stipulated by the expansion of TNC international operations. In practice, it is related to pricing goods, services, know-how and intellectual property that are transferred across borders within corporate networks. The prices such assets are transferred at determine the income of both parties and, thus, the tax base of the relevant countries. Theoretically, if the calculated transfer price provides a reasonable distribution of income, the tax authorities of both countries receive a fair share of tax revenues. However, any TNC may want to take advantage of various levels of taxation and “pump over” its income into the country with a lower level of taxation.
It is reasonable to consider the essence of TP in the context of economic interests of various subjects of this process. Depending on their role in this process, these subjects are international and national companies, as well as government bodies.
As a result of applying the TP system, companies can get considerable benefits and meet their own economic interests that are not only related to the increase in income, but are more complex.
In general, the main reasons for the companies participating in TP include the following:
1) Optimization of activities: tax optimization (reduction of the tax burden) and efficient distribution and allocation of assets,
2) Control over supply and demand within the company,
3) Keeping trade secrets when transferring technologies within the company,
4) Improving the company competitiveness in target markets,
5) Improvement of the company’s consolidated financial result, in particular, the efficient use of transfer prices subject to applying international accounting standards, and
6) Efficient placement of investments and credit resources.
State bodies have the following motives related to TP:
1) Increase in budget revenues by regulating TP,
2) Protection of national producers,
3) Creating the same competitive conditions for companies in the national market, and
4) Avoidance of maladjustments in the payment balance, which may affect the country’s economy, exchange rate, etc.
Based on the concept of TP, this mechanism is referred to the prices at which transactions are concluded between the legal entities that are members of one international corporation. This has an impact on selecting the jurisdiction for income taxation [10].
At the same time, transfer prices can be classified into three groups: 1) the ones corresponding to the market prices, 2) the ones that are higher than market prices, and 3) the ones that are lower than market prices (the last two cases will be accepted as the manipulation of transfer prices). Market prices may differ under the impact of two factors — objective (the lack or difficulty in obtaining information about market prices for certain types of goods, works, and services) and subjective (obtaining additional economic benefits, including as a result of “tax planning”). According to the authors, the manipulation of prices in TP can be the difference in the transfer price from the market one for the relevant goods, works, and services arising under the impact of a subjective factor (obtaining economic benefits).
The analysis of using the TP system in international markets makes it possible to define the following main features:
1) Principles of applying transfer pricing in various international companies differ. They can be based either on the market ones, exceed, or be lower than the market ones for various parties and transactions. Consequently, it does not go about unequivocal overestimation or undervaluation of market prices, but rather about the adjustment of prices to a certain business transaction in order to solve specifically set managerial tasks.
2) The scope of activity of PT extends to companies of all industries and areas — manufacturing, trade and intermediary sector, financial and credit, insurance business and other industries.
3) Use of TP is an efficient instrument for achieving key strategic goals of organizations and groups of companies.
4) Transfer prices can be applied to those types of goods, finished products, works, and services that actually are an intermediate product, or appear as a part of the final product (goods, work, and services) production, etc.
Improper use of transfer prices can cause the removal of weak competitors, barriers for new competitors to enter the market, and the monopolization of certain markets. In this regard, international organizations, home countries and countries that accept foreign direct investments of TNC implement certain mechanisms to control and regulate TP.
TP is regulated at the interstate level in accordance with international requirements set by the OECD TP Guidelines [7]. Most developed as well as developing countries implement OECD principles into their national TP control and regulation systems. It is necessary to note that non-OECD countries are also recommended to follow the Directives. To publicize them, multilateral seminars are held. Here problems of TP are discussed, and the Directives provisions are explained to representatives of tax administrations. The United States do not participate in these events, because their TP regulation system is much older (it is believed that the first regulatory legal act of the United States related to the TP regulation was introduced as early as in 1928 under Section 45 of the Tax Act adopted by the US Congress). That is why other countries either use the US experience or are guided by the OECD principles, although there are also combined variants. Both systems (OECD and USA) are very similar to each other. In particular, both are based on the market price principle and have similar TP methods. However, in the USA the mechanisms for the practical application of regulation standards and provisions are much more developed.
Japan and the United Kingdom are a prime example of developed countries whose national TP regulation systems are based on OECD.
The National Tax Administration of Japan regulates TP on the basis of the law on special taxation measures and the law on special taxation in the context of tax agreements. These rules are also based on OECD principles and are applied to prevent the movement of assets and double taxation. These rules also protect Japanese TNC from audits and sanctions by the Internal Revenue Service.
In the United Kingdom, the Board of Inland Revenue regulates TP according to the Income Tax and Corporate Tax Act adopted in 1998. The standards for the TP regulation for both tangible and intangible assets are similar to the OECD principles.
Despite some differences in various countries from the offered guidelines, in general, it is possible to note that the OECD Guidelines have made the basis for forming a national transfer pricing policy in Russia, Belarus, Kazakhstan and other countries.
It is necessary to note that the use of the OECD TP Guidelines is beneficial not only for tax authorities that now consider operations on TP as a promising object of tax control, but also for companies, because their correct use allows avoiding fines from tax authorities, reducing risks of double taxation and strengthening the positions during the audit.
A. Information Support for Tp In the System of Business Partnership of Enterprises in International Markets
Now all business entities that use TP systems in international markets face the need in the efficient information support for TP. Therefore, the main thing for such entities is to form a well-adjusted data system for decision-making and control over TP and controlled transactions.
In this case, it means that for the TP system to function efficiently and not to cause permanent risks for the enterprise in terms of the possibility to get considerable fines within the tax control, it is necessary to have a well-adjusted management and financial accounting system in order to provide all departments directly related to concluding and executing contracts with counterparties within the affiliated entities with access to top quality information.