NAVIGATING TRANSFER PRICING REGULATIONS; ENSURING COMPLIANCE AND MITIGATING RISKS

Abstract

Transfer pricing is a complex and significant aspect of international taxation and plays a crucial role in determining the allocation of profits and taxes across different jurisdictions. The concept of transfer pricing arises from the need to ensure that intercompany transactions are conducted on an arm’s length basis, as if the transactions were between unrelated parties. This principle ensures fairness and minimizes the potential for tax avoidance and profit shifting. The implications of transfer pricing extend beyond taxation, it affects trade policies, investment decisions and economic development as it deals with the allocation of profits and resources across jurisdictions. This paper addresses the problem of manipulation of intercompany transactions and pricing by MNEs to shift profits artificially and minimize tax liabilities. This not only undermines the integrity of national tax systems, but also erodes public trust in corporate responsibility. The paper further examines the role of the arm’s length principle, in ensuring that transactions between related entities within MNEs are conducted at prices akin to those between independent parties. It recommends compliance with transfer pricing regulations to avoid legal and financial consequences as non-compliance can lead to audits, penalties and reputational damage. Therefore, it is imperative for MNEs to maintain accurate documentation and conduct thorough analysis to demonstrate that their transfer pricing practices are consistent with the arm’s length principle. The doctrinal method of research is adopted, relying mostly on Policies, Regulations, Statutes and Guidelines.