Economic globalization can be defined as a continuous process of integration and interdependence of national, regional and local economies for the allocation of productive resources (goods, services, rights, people, technologies and capital), economic production and profit generation to remunerate the productive resources employed.
This simplistic definition only serves for this exercise, since we have other relevant factors to study. Among these factors, just to illustrate, is the desire or objective of the entrepreneur or shareholder.
Guided by their desires and objectives, entrepreneurs and shareholders make decisions to allocate resources, perform functions and take risks. And the ultimate (or most common) purpose is to obtain the best return for the resources allocated, functions performed and risks assumed.
It is important to note the dynamics that large global corporations have imposed on world trade in the last 20 years, motivated by the integration of economies and technological progress.
For their part, tax administrations, aware of the dynamics of economic globalization, began to look for ways to reconcile their right to tax profits and avoid double taxation.
If, on the one hand, corporations seek to maximize profit (again, in a simplified view), the Tax Authorities in the various countries impose legal and administrative obligations that can differ from one country to another and result in higher tax burdens and compliance costs. Compliance.
This scenario arises from the perspective that transactions between companies in the same multinational group can take place under conditions not seen on the open market, resulting in an abnormal advantage for one of the parties.
The Organization for Economic Cooperation and Development (OECD) took the lead in establishing guidelines for a single standard for interpreting these operations, although this was not its objective when it was created. In 1979, the OECD published the first version of the Transfer Pricing Guidelines and established as its "cornerstone" the "arm's length" principle, which I will define as the Full Competition Principle:
- Ensuring a correct determination of the tax base in the different countries
- Avoiding double taxation in different countries
- Minimizing conflicts between tax administrations
Objectively, the OECD Guidelines set out the way to find the Profit that would have been obtained between the parties if they had been independent parties by means of Transfer Pricing Methods. Imagine the challenges of these methods!
The application of the "arm’s length” principle is generally based on a comparison of the conditions applied in a controlled transaction with those applied in independent transactions. For these comparisons to be useful, the economically relevant characteristics of the situations under comparison must be sufficiently comparable.
Being comparable means that none of the differences (if any) between the transactions being compared could materially affect that comparison, or that reasonably accurate adjustments can be made to eliminate the effects of any such differences.
In our next article we'll look at the calculation methods provided by the OECD, the selection of methods and the calculations.
See you there!
Bluemind
Demetrio Barbosa
demetrio@tpbluemind.com
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