Tax Policy Challenges in the 21st Century

S. 300I. Transfer Pricing – quo vadis?

Today’s economic world has apparently become one without economic borders. Due to the ‘developments in telecommunications and information technology, falling transport costs, deregulation of financial transactions and the integration of financial markets, as well as the growth of new market economies in Asia and Eastern Europe’, increasingly fluid world trade and foreign direct investments are less constrained by, and in fact less associated with, any particular ‘geographies’ or political jurisdictions than ever before, even though tax regulation still relies on divisions of the tax base framed by these notions. Within this globalized world, Multinational Enterprises (MNEs) have an important role, as supposedly 60% of the global trade takes place within MNEs. The individual companies of an MNE are generally taxed as separate entities under each jurisdiction’s domestic law; the transactions between those related entities might however not always be the result of competing economic interests. This is where transfer pricing rules come into play, providing in most cases for an allocation of income between related entities based on what unrelated parties ...