Transfer Pricing and Taxation
Apart from the sale of products or the rendering of services to customers, a company may also sell products or provide services to its affiliates or subsidiaries. In the latter case, a price may not be charged, or is chargeable, at a rate which is different from that charged to other persons. This is because of the business relationship and which purpose is to minimize the operational costs and expenses for the affiliates or subsidiaries. The price being charged to those affiliates or subsidiaries is the transfer price.
However, for tax purposes, under the Revenue Code, it is deemed that all prices or remunerations that the company receives from any sales or services shall be market prices. Unless, in the event that it is reasonable not to charge any price or remuneration, or to charge the price or remuneration at a rate lower than the market price. This is one of the statutory conditions for calculation of net profits of any companies.
From the above principle, when a company enters into any business transactions with its affiliates or subsidiaries, then it is deemed that a transfer price is fixed in accordance with the market price for the calculation of its taxable profit.
While the Revenue Code provides no definition of the market price, the term is defined by the Order of the Revenue Department No. Por. 113/ 2545, Re: Income Tax Payable of Companies and Juristic Partnership in the Event of Transfer Pricing to be in accordance with Market Price. Under the Order, market price means the price of remuneration, service fee or interest, which is fixed in commerce between independent contractual parties in good faith, for the transfer of property, rendering of service, or lending of money, of the identical character, type, or kind, on the date that the transfer of property, rendering of service, or lending of money, is conducted.
The term independent contractual parties under the Order means any contractual parties which have no relationship of management, control, or joint investment, between them, whether directly or indirectly.
Therefore, if a company or juristic partnership enters into a business transaction without receiving any income, or the income derived is lower than the market price, or the expense incurred is higher than the market price, then such income or expenditure shall be adjusted to be in accordance with the market price.
The Revenue Order provides 4 methods of calculation to achieve the market price as follows:
(1) Comparable Uncontrolled Price Method. The income or expense shall be compared with the price, service fee, or interest, collected in commerce between independent contractual parties on the transfer of property, rendering of service, or lending of money, of the same type and kind, and under identical or similar conditions, with that of the company
(2) Resale Price Method. The price, or remuneration, of goods or services that an affiliate or subsidiary company has bought from a connected company, and which are then resold to an independent party, and such price or remuneration shall have deducted from it an appropriate amount of gross profit, which shall be calculated by the method specified under the Order.
(3) Cost Plus Method. Under this method, the cost of the property sold or the service rendered shall be increased with an appropriate amount of gross profit, which shall be obtained by the calculation method specified under the Order.
(4) Other Methods, which are internationally recognized and suitable to business circumstances, in which the transfer of property, render of service, or lending of money, is transacted, under the condition that the methods aforementioned in (1), (2) and (3) may not be used for calculation of the income or expense to gain the market price.
It is summarized that the above Revenue Order corresponds with the statutory conditions and provisions on the market price under the Revenue Code. It prescribes for criteria, guidelines and calculation methods to establish the market price in the event of transfer pricing.
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