Thought leadership from our experts

Transfer Pricing is here to stay

International transfer pricing rules and me are almost the same age; still young, one may say… They were born within the Organization for Economic Cooperation and Development (OECD) in the form of the so-called "Transfer Pricing Guidelines", in 1979. The Arm's Length Principle has always been at the backbone of transfer pricing, which is older, indeed (it appeared in the first half of the last century within the League of Nations Model Tax Conventions). Said Principle is understood as the agreement of transactions among related parties as if those were unrelated, meaning under fair market (or commercial) conditions.

Transfer Pricing Guidelines have had changes during this time, but not as much as the world trade evolved over these years. With the progress of technology and the greater globalization of economies, multinational businesses became more and more powerful. On its turn, international tax rules were in place for almost a hundred years, becoming undoubtedly old-fashioned. Facing this scenario, transfer pricing took a star role in the political and commercial agenda. Hence the OECD, along with the G-20 (a forum for 19 of the world's largest economies and the European Union) launched, five years ago, the "BEPS" project.

Base Erosion and Profit Shifting–BEPS is the greatest challenge for economies nowadays. When you read the purpose of such a project, you realize that transfer pricing is its ultimate drive: that profits are reported where the economic activities that generate them are carried out and where value is created. BEPS package of Actions (15 in total) are in place since fiscal year 2016 and 17, with (today) 116 countries tracking its implementation and progress under the Inclusive Framework on BEPS. Colombia, my country, is not only within this framework but it was also admitted as an OECD member this year, 2018.

The Inclusive Framework on BEPS are to meet in 2020 to review BEPS' Actions results. Furthermore, the OECD has recently released other works in transfer pricing and it is currently developing others, including: hard-to-value intangible assets and application of the profit split method; intra-group services; transfer pricing aspects of financial transactions; attribution of profits to permanent establishments, among others.

It is then clear that transfer pricing, which was initially expected to rule less than one third part of world trade, it is now understood as a key aspect for international tax regimes. We have new Transfer Pricing Guidelines that include further substantial and formal obligations for multinational enterprises. Tax administrations are, not only creating a network for automatic interchange of information (out of audit processes), but they are also investing in resources to track international trade and structures.

In Colombia, taxpayers obliged to transfer pricing duties in 2017, must file in next September the Master File of multinational groups, where a description of structures and their global share of incomes and risks, must be disclosed. Therefore, both governments and companies shall stand strong in these still young transfer pricing affairs, which, without a doubt, are here to stay.