• Transfer Pricing

Transfer pricing continues to be a burning issue on multiple, converging fronts.While globalisation and the continued growth of international trade have made inter-company pricing an everyday necessity for many businesses, the drumbeat of new regulations, audits, enforcement actions – and sharply higher penalties – continues to grow louder.

In an era of fiscal shortfalls, tax authorities see transfer pricing as a soft target, and more and more countries are implementing new transfer pricing documentation requirements. At the same time, transfer pricing strategies are increasingly the subject of unwanted controversy — with the phrase ‘transfer pricing’ frequently used in the same sentence as ‘tax shelters’ or ‘tax evasion’ on the business pages of newspapers.

Transfer prices are used  in the exchange of goods and services between the parent company and its subsidiary or between two subsidiaries of the same company. Global companies often manipulate the total realized profits using transfer prices, shifting it to a country where they have a branch in which the tax rate is lower than in the country in which it was created.

Transfer pricing rules in most countries are based on what is referred to as the “arm’s  length principal” – which requires that transactions between related parties contracts under market conditions, and the conditions under which they would have carried out the same transaction between unrelated parties under the same or similar conditions. The OECD has published guidelines based on the arm’s length principle.

There are many transfer pricing methods, and some systems give preference to a specific method of testing prices but the method used to test the appropriateness of related party prices should be that method that produces the most reliable measure of arm’s length results.

Traditional transactional methods are:

  • Comparable uncontrolled price method;
  • Cost plus method;
  • Resale price method;

And profitability methods such as:

  • Comparable profits method;
  • Transactional net margin method;
  • Profit split method.

In Serbia, although the provisions on transfer pricing tax legislation exist since 1991, only with the recent law amendments these are actually introduced into practice in Serbia. According to the current legislation, transfer pricing documentation is mandatory and is to be filed with the annual tax return of entities that have transactions with related parties. In addition, methodology for the analysis and calculation is stipulated by Transfer pricing Rulebook and it is in line with international standards, that is, OECD guidelines.

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