The Only Level Playing Field - Transfer Pricing (between Tax Payer and Tax Authorities)

As businesses continue to expand globally, transfer pricing has all the more become an increasingly critical aspect of international taxation. Transfer pricing refers to the pricing of goods, services, and intangibles exchanged between entities that are under common control or ownership. The goal of transfer pricing is to ensure that transactions between related parties are ?at ?pricing (transfer price) as if they were conducted between unrelated parties.( an arm’s length basis)

However, transfer pricing has become a contentious issue between taxpayers and tax authorities. Taxpayers may want to minimize their tax liability by setting the transfer price of goods or services exchanged between related parties at a lower rate than the market value. On the other hand, tax authorities want to ensure that they collect their fair share of taxes and may challenge the transfer prices set by taxpayers.

To address this issue, transfer pricing regulations have been put in place. The regulations require taxpayers to prepare and file a list of documentation to demonstrate the arm’s length nature of their transactions. The burden to provide sufficient evidence to support the transfer prices lies on the taxpayers.

Once the taxpayer has fulfilled its obligation by filing the necessary documents, if the tax authorities believe that the transfer price is not at arm’s length and wish to disturb the same, the onus would shift on the tax authorities to prove otherwise ( by producing necessary documents or evidence countering the taxpayer's documents).

This creates a level playing field between taxpayers and tax authorities. Both parties have the responsibility to provide evidence to support their arguments. It ensures that taxpayers are not unfairly burdened with proving their compliance with transfer pricing regulations, and tax authorities are not allowed to make assumptions about the taxpayer's transfer pricing practices otherwise without providing evidence to support their claims.

In conclusion, transfer pricing is a critical aspect of international taxation, and its regulations provide a level playing field for taxpayers and tax authorities. The burden of proof lies on taxpayers to demonstrate the arm’s length nature of their related party (controlled) transactions.and for ‘otherwise’, on the tax authorities. This ensures that both parties are held accountable in their respective roles and neither the taxpayer take undue advantage through related party transactions nor the tax authorities act arbitrarily. This is a level playing field in an unequal power base.