The globalization of the economy has undoubtedly brought many benefits, one of them being that commercial and financial operations can be carried out from and to any place in the world, however, due to the fact that such operations do not have the same tax treatment in each of the countries involved, it has also generated a series of problems for the Tax Administrations and the companies.
Companies need to become more efficient in an increasingly competitive market and this implies that they have to adopt the most efficient structure to save costs and expenses and to maximize their profits, generating a series of operations between companies of the same economic group.
These operations between related companies have become the focus of the Tax Administrations, even more so since the OECD, through its guidelines, has directed its attention to this type of operations.
What the OECD is effectively trying to avoid is that in this search for different options that companies can implement to save expenses and costs and enhance their profits, the erosion of tax bases is not generated.
The situation described above has generated that most countries have adopted the application of transfer pricing based on the arm's length principle, which basically seeks an equitable tax treatment for transactions between related and independent companies.
In line with this, the application of the arm's length principle may become an administrative burden for the companies and for the Tax Administrations, so that in practice it will depend a lot on the requirements of the tax authorities to verify the application of such principle.
In order to determine whether transactions between related parties are consistent with the application of the arm's length principle, a number of transfer pricing methods have been adopted, some based on transactions and other methods based on results. It is always essential to apply the most appropriate method according to the specific case under analysis.
In this line it should be clear that the choice of the most appropriate method involves evaluating the different methods that could be applied and, on this basis, to see which is the most reliable to determine the market value. Therefore, according to the OECD Guidelines, the selection process must weigh the advantages and disadvantages of the accepted methods, the nature of the transactions, the availability of reliable information, the degree of comparability, among other factors. There is no one method applicable to all cases.
Thus, there are a series of factors for the determination of the most appropriate method, which could place the Companies in the dilemma of opting for the method that can be most defended, while the Tax Administrations can choose the method that generates more objections and income for the Treasury.
The above is certainly far from the application of the arm's length principle, since it has become a mechanism to generate tax revenues by the Tax Administrations.
The jurisprudence in some countries is still insufficient to overcome this drawback, so it is still a challenge for taxation to correct the erosion of the tax base without generating tax cost overruns and reducing the efficiency of the companies.
by Martín Ramos Chávez, Partner of +Value
