Surveys of tax and finance directors of multinational companies show that transfer pricing is their greatest concern. Governments share the concern: More than 50 countries have some form of transfer pricing legislation. And American tax authorities estimate that the U.S. is losing at least US$28 billion annually in potential transfer pricing revenues.
Transfer pricing issues emanate from this simple truth: Multinationals are prone to tax planning that attempts to place as much of their profits as possible within lower-tax jurisdictions. One way of achieving this is through the allocation of revenue and expenses in intracompany transactions. A subsidiary in a high-tax jurisdiction, therefore, may minimize the prices it charges for goods supplied or services rendered to a sister company in a lower-tax jurisdiction. The reduced profits in the higher-tax jurisdiction and increased profits in the lower-tax jurisdiction translate into a better after-tax bottom line for the enterprise as a whole.
