(LUẬN văn THẠC sĩ) improvement of efficiency for tax management of multinational enterprises

FOREIGN TRADE UNIVERSITY DISSERTATION IMPROVING TAX MANAGEMENT OF TRANSFER PRICING ACTIVITIES OF MULTINATIONAL ENTERPRISES IN VIETNAM Major: The master of International Trade Policy an

FOREIGN TRADE UNIVERSITY

DISSERTATION

IMPROVING TAX MANAGEMENT OF TRANSFER PRICING ACTIVITIES OF MULTINATIONAL ENTERPRISES IN VIETNAM

Major: The master of International Trade Policy and Law

Full name: Le Thi Thuong

Ha Noi - 2017

FOREIGN TRADE UNIVERSITY

DISSERTATION

Improving Tax Management Of Transfer Pricing Activities Of

Multinational Enterprises In Vietnam

Major: The master of International Trade Policy and Law

Full Name : Le Thi Thuong SUPERVISOR : Assoc Prof Ph.D Nguyen Viet Dung

Ha Noi - 2017

CERTIFICATION

I hereby certify that the thesis with the title: "Improving Tax Management of Transfer Pricing Activities of Multinational Enterprises in Vietnam" is my own

research and does not reproduce any other materials The data indicated in the thesis

is clear, accurate and are collected from the confident sources of information

The Author

Le Thi Thuong

ACKNOWLEDGMENTS

In order to complete this thesis, besides the efforts of myself, I have received the help, encouragement and guidance of my teachers, friends, colleagues and family throughout the course as well as in the period of the thesis research

Special thanks to Assoc Prof Ph.D Nguyen Viet Dung, who was dedicated to guide and help me in the process of researching and writing this thesis

I am grateful to the teachers in the Council of Assessment who gave me the valuable insights and comments, supporting me to complete the thesis

I am grateful to the teachers teaching at the Faculty of Postgraduate Education

of the Foreign Trade University for the interesting and useful lectures, for the enthusiastic transmission of the valuable knowledge and for the best conditions offering in the process of the course

I want to say many thanks to my colleagues working on tax department who support me with a lot of data and information related to tax management of transfer pricing in Vietnam and other countries

I am grateful to my family and my colleagues for their encouragement and supports during the course and the period of thesis research

This thesis studies on the tax management of transfer pricing – not a new but a very complicated issues required various knowledge, skills and practical experiences Thus, the thesis has the inevitable shortcomings and limitations I look forward to receiving valuable comments for improving the thesis

Sincerely,

Hanoi 2017

The Author

Le Thi Thuong

TABLE OF CONTENTS

LIST OF ABBREVIATIONS vi

INTRODUCTION 1

CHAPTER 1: THEORETICAL BASIS FOR TAX MANAGEMENT OF TRANSFER PRICING 8

1.1 Transfer Pricing 8

1.1.1 The concept of transfer pricing 8

1.1.2 Multinational enterprises and associated enterprises 10

1.1.2.1 Multinational enterprises 10

1.1.2.2 Associated enterprises 11

1.1.3 The arm’s length principle 12

1.1.4 Transfer pricing methods 13

1.1.5 Impact of transfer pricing 18

1.2 Tax management of transfer pricing 20

1.2.1 The concept of tax management of transfer pricing 20

1.2.2 History of tax management of transfer pricing in the world 20

1.2.3 Factors of tax management of transfer pricing 21

1.2.3.1 Managing entities 21

1.2.3.2 Managed objects 22

1.2.3.3 Management tools 22

1.3 Experience of Some Countries in Tax Management of Transfer Pricing 23 1.3.1 China 23

1.3.2 India 28

CHAPTER 2: PRACTICAL SITUATION OF TAX MANAGEMENT OF TRANSFER PRICING OF MULTINATIONAL ENTERPRISES IN VIETNAM 33

2.1 Transfer pricing of multinational enterprises in Vietnam 33

2.1.1 The establishment and operation of multinational enterprises in Vietnam 33

2.1.2 The motives for formation of transfer pricing in Vietnam 36

2.1.2.1 The tax policy and incentives for enterprises with foreign direct investment 36

2.1.2.2 The difference in the tax base between Vietnam and other countries 38 2.1.2.3 The Operation Purpose and Policy of Multinational Enterprises 39

2.2 History of formation and development of tax management of transfer pricing in Vietnam 39

2.3 Practical situation of tax management of transfer pricing in Vietnam 42

2.3.1 Managing entities 42

2.3.2 Managed object 45

2.3.3 Management tools 47

2.3.3.1 Legal legislation 47

2.3.3.2 Tax examination and audit 53

2.3.3.3 Database used for transfer pricing analysis 57

2.3.3.4 Economic development and international cooperation on transfer pricing management 57

2.4 Tax Transfer Pricing Outstanding Cases in Vietnam 58

2.4.1 Keangnam Vina 58

2.4.2 Metro Cash & Carry 60

2.4.3 Coca-Cola Beverages Vietnam Co., Ltd 61

2.4.4 Hualon Corporation 62

2.5 Evaluation of tax management of transfer pricing in Vietnam 63

2.5.1 Achievements 63

2.5.1.1 Sufficient regulations on transfer pricing 63

2.5.1.2 Certain achievement in tax examination and audit 64

2.5.1.3 Training for tax officers 64

2.5.2 Limitations 66

2.5.2.1 Lack of comprehensive legal framework 66

2.5.2.2 Lack of comparables for determination of arm’s length price 67

2.5.2.3 Lack of knowledgeable and experienced human resources in tax authorities 68

2.5.2.4 Lack of database on prices and average profit margins for comparability analysis 69

2.5.2.5 Vietnam position in international arena 69

2.5.2.6 Insufficient application of arrangements on transfer pricing 70

CHAPTER 3: RECOMMENDATIONS FOR IMPROVING TAX MANAGEMENT OF TRANSFER PRICING OF MULTINATIONAL ENTERPRISES IN VIETNAM 71

3.1 Orientation for recommendations 71

3.2 Recommendations for Improving Tax Management of Transfer Pricing of Multinational Enterprises in Vietnam 73

3.2.1 Improving legal regulations on transfer pricing 73

3.2.2 Forming database for comparability analysis 75 3.2.3 Improving risk assessment in selecting enterprises subject to tax

examination and audit 78 3.2.4 Establishing separate procedures for tax examination and audit of transfer pricing 79 3.2.5 Training for tax officers and tax experts on transfer pricing issues 81 3.2.6 Coordinating between related authorities in Vietnam 83 3.2.7 Enhancing dissemination of transfer pricing regulations to taxpayers 85 3.2.8 Participating in international organizations on transfer pricing management 87

CONCLUSION 89 REFERENCES 91

CIT Corporate Income Tax

CPM Comparable Profits Method

CUP Comparable uncontrolled price method

GDT the General Department of Taxation of Vietnam

GSO General Statistics Office Of Vietnam

MNE Multinational Enterprise

MOF Ministry of Finance of Vietnam

OECD the Organization for Economic Co-operation and

R&D Research and Development

RPM Resale price method

INTRODUCTION

I The necessity of the research

Globalization gives opportunities for domestic companies to trade and invest internationally It is also a prerequisite for the establishment of multinational enterprises (MNEs) with business operation of increasing diversity and complexity Taking advantages of preferential policies, especially tax incentives, of many countries in attracting foreign investment, MNEs have performed a range of tricks

to maximize overall profits In which, transfer pricing (TP) is a trick of shifting profits among related parties of a MNE through associated transactions TP has become popular in the world with growingly complex and sophisticated forms, causing tax losses and affecting the social-economic development As a consequence, governments always pay special attention to TP management, notably tax management Tax management of TP is one of the hottest issues which have been discussed on regional and global forums International organizations, consisting of the Organization for Economic Co-operation and Development (OECD) and the United Nations (UN), have provided several publications like guidelines or model tax conventions on this issue

In Vietnam, after approximately 30 years from “Doi Moi”, there are certain achievements in attracting foreign investment Registered and implemented capital

of FDI in 2016 reached USD 24.3 billion and 15.8 billion respectively, which are the highest ever, with more than 2,500 new projects For the first seven months of year 2017, the sum of registered capital from new projects, additional funding and investment in the form of capital contribution and share purchasing reached USD 21.93 billion, increasing 52 percent in comparison to the same period of 2016 To the date of 20 July 2017, there are 23,737 effective projects with total registered capital of USD 307.86 billion The accumulated implemented capital of foreign investment’s projects is estimated to reach USD 163.9 billion, equaling to 53.2 percent of total effective registered capital Foreign invested sector also contributes

a large portion of imports and exports, accounting for more than 70 percent of total

export turnover and around 60 percent of total import turnover in the previous two years [MPI, 2017]

Although substantial amount of total invested capital, contribution of this area

to state budget is only a small proportion According to data from General Statistics Office of Vietnam (GSO), for the first four months of 2017, national revenue from foreign invested sector (crude oil excluded) achieved VND 47.3 million billion, contributing to around 23.5 percent of estimation, while the figures for private sector and state sector are VND 52.1 and 49.4 million billion In 2016, domestic income from foreign invested enterprises is VND 147.7 million billion out of the total income of VND 744.9 million billion, accounting for around 19.83 percent That of year 2015 is 19.06 percent [GSO, 2016] In addition, a large part of foreign invested enterprises report losses over the past years but still expand their business operation Coca-Cola is one outstanding example Coca-Cola consistently reported a loss, as of the end of 2011, reaching VND 3,768 million, which exceed the total initial invested capital Despite such losses, its revenue gradually grew from 20 to

30 percent annually

This situation raises questions about the compliance of foreign enterprises with tax laws and regulations of Vietnam Vietnam government has given concerns

of tax management of foreign investment, especially TP, since the 1990s, but there

is no legal documents regulating this activity until the year 1997 At present, after several times of amendments and supplements, Decree No 20/2017/ND-CP dated

24 February, 2017 and effected 1 May, 2017 (Decree 20) is the document with highest legal effectiveness governing TP Based on such regulations and action plan proposed by Ministry of Finance (MOF), tax examination and audit of TP have been seriously implemented in recent years In the year 2015, the General Department of Taxation of Vietnam (GDT) established official Transfer Pricing audit teams in the GDT and in four major provinces: Hanoi, Ho Chi Minh City, Binh Duong and Dong Nai in order to conduct specialized tax examination and tax audit

However, up to now, legal regulations on TP have not yet completed with

many blind spots of policy Besides, tax examination and tax audit of TP are limited due to lack of practical experiences and qualifications

From the above-mentioned reasons, the author chooses the topic “Improving Tax Management of Transfer Pricing Activities of Multinational Enterprises in Vietnam” for the research Starting from theoretical basis and actual situation of TP

tax management in Vietnam, the author shall make some necessary recommendations on policy and practical action aiming at efficient tax management

of TP, contributing to sustainable development of the country

II Research situation in the world and in Vietnam

Tax management of TP is not a new issue on the research of individuals and organizations in the world

TP rules were introduced in domestic legislation by the United Kingdom in

1915 and by the United States (US) in 1917 The US developed TP regulations in

the Internal Revenue Code (IRC) in 1930 and TP law dated 1st July 1994 The OECD and UN have also publications concerning this issue

The OECD first issued The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (OECD guidelines) in 1995,

which was then amended and updated in 1979 and 1984 The guidelines not only represent a consensus among OECD members on dealing with TP issues, but also a basis for developing countries to establish their own TP regulation

“International Income Taxation and Developing Countries” in 1988 was the

first publication of the UN on TP, which followed by a report on Transfer Pricing of The United Nations Conference on Trade and Development (UNCTAD) in 1999

The guideline named the United Nations Practice Manual on Transfer Pricing for developing countries (UN Manual) which was first introduced in 2013 and revised

in 2017 by the United Nations, is one of the most important publications which updates all TP guidance used for establishing TP regulations for countries worldwide

The European Council (EC) also pay attention to this phenomenon, on 17 May

2011, they issued guidelines on low-value-adding intra-group services They are endorsed on the basis that their implementation should contribute to reducing tax disputes

The European Commission adopts several measures which consist of the possibility of a “common consolidated corporate tax base (CCTB)” and “home state taxation”, using apportionment to calculate the amount of taxes to pay in one operating country of an MNE Apportionment would be followed an agreed formula, based upon some criteria of business activity such as some combination of sales, payroll, and assets Recently, EU has also developed projects to enhance TP dispute resolution and harmonize TP documentation requirements In May 2011,

EC published some guidelines on low-value-adding intra-group services

The research of Hongren, Charles and partners in the book Cost Accounting:

as well as of competent authorities in Japan and Korea In 2013, Richardson,

Taylor and Lanis introduced the research Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms which reported factors

affecting TP of Australian firms going online There are a lot of researches regarding TP and related issues of Weicenrieder, Hatem Elsharawy, Duran Timms and other authors

Besides, some large international independent auditing firms like KPMG, Earn&Young, Dellotte and PriceWaterHouseCooper provide analysis and review

on TP every year to update the actual situation and make forecast for the future

In Vietnam, the author Nguyen Van Phuong did the research “Kiểm soát nhà nước đối với gian lận chuyển giá tại Việt Nam” (Control of State for transfer pricing fraud in Vietnam) in 2015 In which, the author specified the principles of

and factors contributing to controlling TP in associated enterprises, then gave solutions to prevent TP in Vietnam In 2012, the author Nguyen Thi Phuong Hoa

did a ministerial research project called “Tăng cường kiểm soát nhà nước đối với hoạt động chuyển giá trong doanh nghiệp trong điều kiện hội nhập kinh tế ở Việt Nam” (Strengthen the control of the State for transfer pricing activities of

enterprises in Vietnam in terms of economic integration) which systemized

theoretical basis of nature, meaning and content of state control of TP and determined directions and measures to strengthen state control of TP in international integration The researcher Phan Thi Thanh Duong chose the topic

“Pháp luật về kiểm soát chuyển giá ở Việt Nam” (Vietnam legislation of controlling transfer pricing) for her doctoral thesis, which analyzed and explained

the relationship between domestic law and international law in TP adjustment In

2011, the GDT introduced the book “Hướng dẫn kê khai giao dịch liên kết khi quyết toán thuế TNDN và chống chuyển giá” (Guidance on declaration of the associated transactions in corporate income tax finalization and anti-transfer pricing) specifying expression of TP and guiding declaration on associated

transactions In addition, there are a wide range of books and articles of many authors regarding TP management

In short, there are various researches on TP management, specifically on tax management, in Vietnam and in over the world However, there is no work analyzing the determinants of tax management of TP of MNEs in a systematic manner

III Object and scope of research

The object of research is tax management of TP of MNEs in Vietnam Tax management of TP is constituted by managing entities, object of management and content of management

In Vietnam, managing entities of TP include Ministry of Planning and Investment (MPI), the MOF, including the GDT and its branches, the State Bank of Vietnam, the State Audit Office of Vietnam, etc However, in this research, the author shall concentrate on the administration of the GDT and its branches on TP

TP is formed by associated transactions among related companies domestically or internationally, but in this thesis, only international associated transactions for purpose of tax avoidance are analyzed Management content in this research shall

be studied on three broad factors: legal regulations, tax examination and audit as well as other factors

IV Research objectives

The objectives of the thesis is building the rationale for TP management, analyzing the practical situation of TP tax management in Vietnam and determining all factors which affect tax management of TP in Vietnam From above analysis and synthesis, the thesis shall make several appropriate recommendations for improvement of tax management of TP in Vietnam To achieve the objectives of the thesis, following specific task shall be performed: Specifying the rationale of transfer pricing to determine the scope and object

of transfer pricing, classify different methods of TP as well as recognize its impacts

in reality

Studying the situation of TP management in the world, categorizing the factors which affect TP management and analyzing how such factors have impacts on TP management

Investigating the practical situation of TP in Vietnam, from that evaluating the achievement and limitations of TP management in Vietnam

Making recommendations to enhance the achievements and overcome the limitations of TP management in Vietnam

TP cases in Vietnam

VI Expected results

The research is expected to make several contributions to theoretical and practical basis as follows:

- Generating theoretical base for tax management of TP of MNEs

- Determining factors contributing to tax management of TP of MNEs

- Analyzing TP activities of MNEs in Vietnam

- Analyzing and evaluating practical tax management on TP of MNEs in Vietnam

- Making recommendations on improving tax management of TP of MNEs in Vietnam

VII Structure of the research

A part from the Introduction and the Conclusion, the research is divided into three chapters as follows:

Chapter 1: Theoretical basis for Tax Management of Transfer Pricing

Chapter 2: Practical situation of Tax Management of Transfer Pricing of MNEs in Vietnam

Chapter 3: Recommendations for Improving Tax Management of Transfer Pricing of MNEs in Vietnam

CHAPTER 1: THEORETICAL BASIS FOR TAX MANAGEMENT OF TRANSFER PRICING

1.1 Transfer Pricing

1.1.1 The concept of transfer pricing

International trade and investment are formed and developed on the basis of comparative advantage A country shall specialize in producing and exporting only those goods and services which it can produce more efficiently or, in other word, at lower opportunity cost than other goods and services which it should import Comparative advantage results from different endowments of the factors of production such as capital, land, labor) entrepreneurial skill, power resources, technology, etc This is the base for domestic companies eager to invest and run business internationally

Globalization creates opportunity for international trade and for companies to expand its business operation by investing to other countries Such companies often established legal structures such as subsidiaries, branches, joint ventures or partnerships to operate in the recipient countries and conduct transactions with one another and with the parent company All legal structures as well as the parent company are separately called associated party and together called an MNE and transactions between them are called intra-group transactions

According to the statistic of OECD, around sixty percent of world trade takes place within MNEs, consisting of international transfers of goods and services, capital and intangibles [OECD, 2012] Those transfers are not only governed by market forces but also by operation forces of the MNE Therefore, in many cases, the transfer prices of transactions between associated parties of MNEs are different from prices set up in transactions between independent companies

There is no official concept of TP, but several definitions are given by some specialists and organizations In the book of The International Taxation System by Andrew Lymer and John Hasseldine, TP were defined as the pricing policies and

practices that are established when physical goods as well as services and intangible property are charged between associated business entities [Andrew Lymer and John Hasseldine, 2012, page 159]

According to Dezan Shira & Associates, TP referred to all types and manners

of inter-company pricing arrangements between related business organizations, generally across international borders These include transfers of intellectual property, tangible goods, services, loans, and other financial transactions [Dezan Shira & Associates, 2010]

In the view of the UN, TP is the general term for the pricing of cross-border, intra-firm transactions between related parties TP therefor refers to the setting of prices at which transactions occur involving the transfer of property or services between associated enterprises, forming part of an MNE [UN, 2013]

The OECD has not given the definition of TP, however they provide the definition of a transfer price as a price, adopted for book- keeping purposes, which

is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises

The OECD guidelines make it clear that the concept of TP should not be confused with tax fraud, or tax avoidance, even though TP transactions may be used for such purposes [Michelle Markham, 2004]

In the scope of research in this thesis, the Author supposes that: “Transfer pricing activities or transfer pricing (transfer pricing) is the establishment of transfer prices for properties, regardless of tangibles or intangibles, which are different from market prices of such properties, between associated enterprises of

an MNE for the purposes of tax avoidance, which contributes to maximum the overall profits.”

From the above definition, TP is occurred in case of (i) transactions between associated enterprises of an MNE, (ii) transfer price different from market price, and (iii) for the purpose of tax avoidance

TP can be occurred in the transactions between associated enterprises of an MNE, this is because such transactions are governed by both market force and MNE operation force, in which operation force is outweigh the market force

One of the bases for evaluating the TP of associated enterprises is market price, also called AL price Transfer price in TP is different from market price, it may be lower or higher than market price Establishment of such prices shall significantly reduce tax liability in country with higher tax rate but marginally increase tax liability in other country with lower tax rate This leads to substantial decrease in overall payable tax amount of MNE In some cases, maybe the transfer price set up within an MNE is in accordance with AL price In such cases, the MNE

is considered as not doing TP and their transactions are not included in the scope of this research

1.1.2 Multinational enterprises and associated enterprises

1.1.2.1 Multinational enterprises

According to the OECD in the publication “OECD transfer pricing guidelines for Multinational enterprises and Tax administrations”, MNE is a group of two or more associated parties operating in more than one law jurisdiction [OECD, 2010]

Why MNEs implement transfer pricing

Since the relationship between associated parties comes from overall interests, the concern of an MNE is overall benefit but not separate benefit of each associated parties By utilization advantages of operation in different countries, MNE is able to relocate the revenue and cost for all associated parties to minimize overall tax liability, or in other words, maximize gross profit of the group The adjustment of revenue and cost results in the establishment of intra-group prices for transactions between associated parties which are not priced on the demand and supply basis

Further, thank to operating in different countries, MNEs can detect the countries with favorable business environment, policy incentives, especially incentives on taxes In addition, each entity has its right to freely make decision on any matter of business operation within legal framework Therefore, they can decide

the transacted price of products or services with the others in certain transactions The establishment of price policy within the group keeps the overall interests unchanged, but it may alter their overall tax liability Through pricing arrangement, tax liability is moved from the countries with higher tax burden to that with lower tax burden Based on specific social – economic policy, the tax policy and tax incentives for enterprise with foreign capital are often different

Another motive for MNE can do TP is the transfer of intangible properties The intellectual properties such as the monopoly of technology or know-how of the mother company are secured while expanding its business to different countries It

is better to transfer its business secrets within the group than to another independent company With the aim of expansion, other intellectual rights, for example, the use

of license, trademark, trade name, consultancy, are also transferred to associated parties It is difficult to estimate the real value of such transferred property Therefore, an MNE can change the transferred value of intangibles to shift profits from one party to others to achieve the goals of increasing gross profit

of two enterprises in different countries

There is no specific common guidance on associated enterprises both in the Commentaries on Article 9 in the UN and OECD Models and in the OECD guidelines This is mainly because TP issues are relevant only if special conditions have been made or imposed between two parties

1

Longman Dictionary

Management, operating or capital contribution factors are conditions which affect the harmony of interests of those enterprises and also the basis for determining the associated relationship Thus, associated enterprises can be formed

in the same country or maybe in many different countries From there, TP is not only taking place in international transactions that can both in domestic transactions In fact, the transfer of interest rates is usually assessed for international transactions due to significant differences in tax policies between countries Meanwhile, because all companies have to comply with national treatment, the tax liability resulting from domestic transactions is almost the same

In the scope of this thesis, TP is researched in international transactions between associated parties of an MNE

The definition of an “associated enterprise” is based on domestic circumstances and hence the concept of one country differs from, to some extent, the concept of other countries However, all of them are established under the relationship of capital, management or control

Associated transactions are understood as transactions which are concluded by associated enterprises

1.1.3 The arm’s length principle

The arm’s length (AL) principle is promulgated by the OECD in Article 9 of The OECD Model Tax Convention on Tax and on Capital It is also mentioned in OECD guidelines According to the Guidelines, conditions to determination of TP are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may

be included in the profits of that enterprise and taxed accordingly [OECD, 2010]

In the Manual of the UN, the AL principle is seemed as an international standard that compares the price in transactions between related entities with the price in similar transactions conducted by independent entities The transfer price

between unrelated parties is often called AL price All different values of AL prices constitute an AL range If the price established between associated parties is not outside the AL range, it may be directed to a TP action Therefore, in certain circumstances, the market consisting of unrelated parties is the measure for verifying transfer prices for transactions between associated entities

However, in reality, it is rare to have two identical transactions Therefore, to determine whether a controlled transactions complies with AL principle or not, it is necessary to use comparable transactions with certain differences which can be reasonably adjusted to eliminate such differences

1.1.4 Transfer pricing methods

To assess whether a price compliance with the AL principle or not, several approaches are applied, called “transfer pricing methods” According to the OECD classification in the OECD guidelines, TP methods can be divided into two broad groups: transaction-based methods and profit-based methods

Transaction-based methods:

Comparable Uncontrolled Price (CUP): This method is used to determine

whether an transactions is controlled or not by comparing price for transaction between related parties (controlled transaction) to price for transaction between unrelated parties (uncontrolled transaction) in comparable circumstances

Figure 1: Comparable Uncontrolled Price Method

Transaction between two Associated Enterprises is controlled transaction

Transaction between Associated Enterprise and unrelated party or between two unrelated parties called uncontrolled transaction

Comparable circumstances of two transactions can be made if there are no differences in transactions being compared that would materially affect the price or material differences can be reasonably adjusted

Reasonable adjustments may be possible for several differences such as the type and quality of the product, delivery terms, volumes of sales and related discounts, product characteristics, contractual terms, geographical factors Unique and valuable trademarks or fundamental differences in the products are features which cannot be reasonably adjusted in this method

This method is a direct measure of determining AL price through involving a direct transactional comparison The content of this method is clear and easy to understand and the result is reliable However, in many cases, it is hard to find comparable uncontrolled transactions in accordance with comparability standards, especially transacting intangibles such as services or intellectual properties Therefore, this method should be applied when one of the associated entities of the transaction is involved in uncontrolled transactions with an independent party or in the transactions of tangible commodity with minor differences between different types

Resale Price Method (RPM:) This method is used to determine the price to be

paid by a reseller for a product purchased from an associated enterprise and resold

to an independent enterprise The purchase price is established so that the margin earned by the reseller is sufficient to allow it to cover its selling and operating expenses and make an appropriate profit corresponding to its performs and the risks

Independent Enterprise

Arm’s length

If the given price is USD 10 and the resale price margin (gross profit margin)

is 20 percent, the AL price shall be USD 8

The factor needs to consider in this method is gross profit margin Comparison can be made if there are no differences between the transactions being compared that materially affect the gross margin or the differences can be reasonably adjusted

In this method, it is functional comparison more than transactional comparison Therefore, product differences are less important in this method than in CUP method In determination of AL price in this method, several issues need to take into account including how substantial value the reseller add to the product, the level of activities performed by the reseller, how significant the seller perform in commercial activity in relation to the resale activity, whether the reseller has the exclusive right to resell the goods, the differences in accounting practices

This method should be used to determine the gross margin of full range of products of a sales company, not only separate product type It is more appropriate for situations where is a weak relationship between the costs incurred and the sales price of the goods However, this method is not a direct transactional comparison and it is difficult to find comparable data due to accounting inconsistencies Therefore, it is applied when CUP method is not applicable or the sales company do not own valuable intangible properties

Cost Plus (C+ or CP): This method analyzes appropriate prices of properties

charged by supplier to a related buyer by adding to costs of the supplier an suitable gross margin, so that the supplier can make an appropriate profit in accordance with market conditions and functions performed

For example, if the cost of Associated Enterprise 1 is USD 500, and the gross profit markup is 50 percent, the AL price is USD 750

The critical factor in this method is determining gross profit margin Comparison can be made if there are no differences between the transactions being compared that materially affect the gross profit markup or the differences can be

reasonably adjusted

To use this method in determining AL range, a number of potential difficulties need to consider, for example, the link between costs incurred and the market price, the differences in the level and types of expenses in connection with the functions performed and risks assumed between controlled and uncontrolled transactions, costs should be excluded from the cost basis

This method is based on internal costs of the MNE, so the information is available for applying this method However, there are some obstacles when using this method, for instance, weak link between costs and market price, no comparable data on gross margin due to accounting inconsistencies

The method is based on the cost of associated enterprise and its gross profit mark up, so it is appropriate for manufacturing or assembling company or relatively simple service providers

Profit-based methods:

Two classes of transactional profit methods are recognized including comparison methods (Transactional Net Margin Method or TNMM/Comparable Profits Method or CPM) and profit-split methods

profit-Profit comparison methods (TNMM/CPM):

The TNMM determines the net profit margin relative to an appropriate base realized from the controlled transactions by reference to the net profit margin relative to the same appropriate base realized from uncontrolled transactions

Ideally, operating margin should be compared to operating margin earned by same enterprise on uncontrolled transaction This method is applicable for any type

of transaction and often used to supplement analysis under other methods

TNMM has almost become the ‘default’ method for taxpayers in recent years The key advantage of the TNMM is that there is often available data in the public domain about the net profits that comparable independent businesses earn from their trading activities in comparable markets with other third parties As such, the

TNMM often proves easier to apply than the CP or RPM methods, and TNMM is less sensitive to minor differences in the products being sold

The main disadvantage of the TNMM is that because there is typically insufficient information in the public domain to be certain, the comparable companies are truly comparable to the tested party

Profit Split Method (PSM)

This method seeks to determine the way that a profit arising from a particular transaction would have been split between the independent businesses that were party to the transaction The PSM divides the profit based upon the relative contribution of each related party business to the transactions enterprise as determined by their functional profile and, where possible, external market data

Over recent years we have increasingly seen multinational groups apply a profit split as the basis of their TP policies For many it is because globalization requires that they manage their business along divisional lines with the consequent scant regard to the profit profile of the underlying legal entities

In many cases, the increasing importance and value of a group’s Intellectual Property (IP) and the often shared nature of the development of that IP, and the attached business risks, may lead taxpayers to the PSM

Despite the advantages of the PSM, there are significant difficulties in applying it in practice The simplicity of the requirement in the OECD Transfer Pricing Guidelines to split the profit between the parties, ‘on an economically valid basis that approximates the division of profits that would have been anticipated and reflected at AL’ reduces the difficulty in working out what profit should be shared and the relative contribution of each participant to the profit share

Profits arising today may have been the result of work undertaken by one of the businesses many years in the past Conversely, including all costs in the profit to

be shared could allow some participants to ‘export’ the cost of their own inefficiency to others

Other methods:

Other unspecified methods may be used to evaluate whether the amount charged in a controlled transaction is at AL Any such method should be applied in accordance with the reliability considerations used to apply the specified methods

An unspecified method should take into account the general principle that uncontrolled taxpayers evaluate the terms of a transaction by considering the realistic alternatives to that transaction, and only enter into a particular transaction if none of the alternatives is preferable to it In establishing whether a controlled transaction achieves an AL result, an unspecified method should provide information on the prices or profits that the controlled taxpayer could have realized

by choosing a realistic alternative to the controlled transaction

An example of other method is The Commodity Rule, also known as the ‘sixth method’ is especially applicable to commodity transactions It is in use, with many variations thereof, by several developing countries for arriving at the arm’s-length price of import and export transactions of commodities such as grains, oil and oilseeds, oil and gas, mining and fishing

The choice of methods, availability of different types of methods and the priority given to various different TP methods are matters often covered by domestic legislative frameworks

1.1.5 Impact of transfer pricing

On tax authorities

Transfer pricing leads to decrease in gross tax liability

Because an amount of profit shifted from the country with higher tax rate to the country with lower tax rate, an amount of tax or duty shall decrease accordingly

Some MNEs engage in practices that seek to reduce their overall tax bills This may involve profit shifting through non-arm’s length TP in order to reduce the aggregate tax burden of the MNE by shifting profits from associated entities in higher tax countries to associated entities in relatively lower tax countries through

either under-charging or over-charging the associated entity for intra-group trade

In short, TP rules are essential for countries in order to protect their tax base,

to eliminate double taxation and to enhance cross-border trade For developing countries, TP rules are essential to provide a climate of certainty and an environment for increased cross-border trade while at the same time ensuring that the country is not losing out on critical tax revenue TP is of paramount importance and hence detailed TP rules are essential

On economics and society

Transfer pricing impacts on revaluation of the capital and income redistribution

Transfer prices serve to determine the income of both parties involved in the cross-border transaction The transfer price therefore influences the tax base of the countries involved in cross-border transactions

In any cross-border tax scenario, the parties involved are the relevant entities

of the MNE group along with the tax authorities of the countries involved in the transaction When one country’s tax authority adjusts the profit of a member of the MNE group, this may have an effect on the tax base of another country In other words, cross-border tax situations involve issues related to jurisdiction, allocation of income and valuation

Transfer pricing causes unfair competition between enterprises

TP may increase profit of MNE, this means improving such MNE productivity over productivity of other enterprises This is unfair for enterprise without implementing TP and complying with all applicable regulations

On MNEs

MNEs are global structures which may share common resources and overheads From the perspective of the MNE these resources need to be allocated with maximum efficiency in an optimal manner Therefore, TP is one of the effective ways for MNEs to allocate the profits of single parties in order to ensure

the hugest gross benefits

1.2 Tax management of transfer pricing

1.2.1 The concept of tax management of transfer pricing

Concepts such as “management”, “administration” and “control” are often defined under the domestic law in many countries and may be extended for TP According to longman dictionary, management means the activity of controlling and organizing the work that a company or organization does

Management is the purposeful impact of managing entities on managed object in order to effectively utilize all the resources and opportunities to achieve goals which have been set out in a fluctuated environmental condition [Loi, 2008, page 13]

In general, management can be understood as the intended action of the managing entity influencing on managed object by using necessary tools in order to achieving particular purposes

In case of tax management, managing entity includes all competent authorities concerned, in which tax departments play the most important role Managed object is TP activity of MNEs, called “taxpayers” in general Management tools consist of all regulations and actions by tax authorities to ensure taxpayers to comply with applicable rules and regulations, for example, related legal provisions, tax examination and audit and other requirements

Therefore, tax management on TP of MNEs can be defined as the ways tax authorities using all necessary tools of tax management (legal regulations, examination, audit, etc.) in order to ensure the compliance of all taxpayers who have related party transactions with all tax law regulations on TP

1.2.2 History of tax management of transfer pricing in the world

TP has regulated in domestic laws for more than 100 years The United Kingdom first introduced its TP rules in 1915 Two years later, the United States published its regulation on this matter However, TP just gain great concern until

the late 1960s along with the development and expansion of international trade This matter not only attracts the attention of developed countries but also becomes

an interest of many developing countries in recent years

Many reports and guidelines on TP are published by international and regional organizations, such as OCED and UN model convention, guidelines, EU, Pacific Asia Travel Association guidelines Such publications are the basis for establishment of domestic regulation on TP in both developed and developing countries

Many countries have introduced specific domestic tax rules to prevent possible tax base erosion through mispricing of transactions between related parties This legislation is almost invariably proposed as being in accordance with the AL principle The AL principle is generally accepted as the guiding principle for allocating income not only among related entities but also among cross-border units

1.2.3 Factors of tax management of transfer pricing

1.2.3.1 Managing entities

Managing entities are all organizations and people in charge of tax management, consisting of tax authorities, tax officers and other related people and organizations

Factors related to managing entities have impact on tax management of TP include: Responsibility and power of managing entities, coordination between managing entities and knowledge and qualification of people working for managing entities

1.2.3.2 Managed objects

Managed object in tax management of TP is TP activities or, in other words, transactions between related entities of MNEs with transfer prices different from prices of similar uncontrolled transactions

Factor related to managed objects which have impact on tax management of

TP includes related party definition

1.2.3.3 Management tools

The main management tools needed to be implemented by tax authorities ranging from tax registration, management of information about taxpayers, tax declaration, tax payment to tax examination and audit as well as dealing with breaches of the law on tax

To implement such contents, managing entities need to use necessary tools of management Regarding TP activities, factors related to tools of management have impact on tax management consist of: Legal legislation (including regulations on documentation requirements, safe habour rules, penalties); tax examination and audit (consisting of procedures and practical implementation); international cooperation on TP management through agreements and arrangements

There are several solutions to deal with tax issues relating to TP by negotiations

Advance pricing agreements

Recently, multinational businesses have often depended on Advance Pricing Agreements (APAs) (or “Advance Pricing Arrangements”, as some countries prefer) with tax authorities, especially in the framework of the Mutual Agreement Procedure These APAs are so named because pricing methodologies are agreed in advance in relation to certain types of transactions, often called the “covered transactions” APAs provide greater certainty for the taxpayer on the taxation of certain cross-border transactions and are considered by the taxpayers as the safest way to avoid double taxation, especially where they are bilateral or multilateral

Many countries have introduced APA procedures in their domestic laws though having different legal forms For example, in certain countries an APA may be a legally binding engagement between taxpayers and tax authorities, while in other countries it may be a more informal arrangement between the tax authorities and the taxpayer

Safe Habour Rules

Safe harbour rules are rules whereby if a taxpayer’s reported profits are below

a threshold amount, be it as a percentage or in absolute terms, a simpler mechanism

to establish tax obligations can be relied upon by a taxpayer as an alternative to a more complex and burdensome rule, such as applying the TP methodologies There are other types of simplified mechanism for TP that the countries concerned also categorize as safe harbours

Safe harbour rules can be an attractive option for developing countries, mainly because they can provide predictability and ease of administration of the TP regime

by a simplified method of establishing taxable profit Supporters of this type of rule point to the advantage of low compliance costs and certainty for taxpayers, as well

as administrative simplicity for tax authorities

It is often stated that safe harbours allow tax administrations (especially when they are just beginning to administer TP laws) to focus their limited resources, including audit resources, on the worst cases of non-arm’s length TP, especially high-margin transactions

1.3 Experience of Some Countries in Tax Management of Transfer Pricing

principle to determine whether a controlled transaction complies with the laws or not China is a big country with sophisticated economical activities However, they have achieved several great results in TP management

The Chinese tax administration has been exploring ways to improve TP administration ever since China introduced a TP tax regime in 1991 Significant developments have been seen in the past two decades by some following efforts Firstly, China has established a relatively sound legal framework composed of TP legislation and specific rules In addition, China has intensified efforts in TP audits and has built a centralized review system under which TP audit cases can only be approved by the national expert panel Furthermore, China has continued to develop the MAP mechanism and APA program Together with that, China has installed a monitoring system that tracks the profits of all the MNEs in China and this country has been committed to developing a TP professional team to handle all possible issues arising

In China’s experience, MNEs have often implemented group TP policies that are sensitive to developed countries’ TP regulations and nuances, but neglect to consider whether the AL principle has been applied properly in developing countries China has implemented several practical solutions that are appropriate with its unique economic and geographic factors to overcome TP issues Such solutions consist of regulations in legal documents and guideline on set-up and action of tax authorities

While the early focus of TP investigations was mostly on tangible goods transactions, China has expanded its attention to various ranges of transactions, including transactions involving intangibles and services As a developing country, China faces a number of difficult obstacles, which include lack of appropriate comparables, quantification and allocation of location-specific advantages, and identification and valuation of intangibles For location savings, the SAT officials have raised the point in competent authority discussions that more profits should be attributed to China due to the efficiencies and lower cost of its labour force, and

more broadly, advantages specific to China including those resulting from Government policies For country premium, the SAT officials argue that a profit premium for companies catering to the China market, for example, company generating a majority of their profits in China, should be taxed in China and are discussing approaches to reasonably quantify such premium For intangibles, the SAT requests that the contribution of each related party to the value creation of the intangible assets should be considered to determine the economic benefits that each party is entitled to Outbound payments: According to the SAT Public Notice No

16 issued on 18 March 2015, outbound payments to overseas related parties should satisfy the arm’s‑length principle and the authenticity test It specifies various circumstances where payments, service fees or royalties paid to overseas related

not allow consolidation of CIT returns for MNEs An MNE with subsidiaries located in various parts of China may, therefore, be subject to multiple TP audits or

in some cases, the so-called national TP audit orchestrated by the SAT A national group of elite TP specialists is being formed to review and approve all TP audit cases in China The group will be formed from the most experienced TP auditors from around China at all levels including city, county, provincial and national The SAT is also considering bringing in additional economists or analysts to handle high-profile/important cases such as those in the automotive industry, which currently may be considered the most high-profile industry in China In addition, out of two main broad methods of determining AL price, China uses the “other appropriate method” to make adjustments in particular cases

Further achievements of Chinese tax authorities are presented in the following points

Establishment of sound legal framework

In china, there are three levels of legislation on TP The highest level is represented by the CIT law which was enacted on 16 March 2007 by National People’s Congress and came into force on 1 January 2008 Chapter 6 of this law

shows that the guiding principle for transactions between related entities is the AL principle, which enables the Chinese tax authorities to make adjustments on taxpayers’ taxable income if their transactions not in accordance with the AL principle The detailed implementation regulation of CIT law is promulgated on 6 December 2007, not only expands on various concepts in CIT law, but also imposes contemporaneous TP documentation requirements and a special interest levy The third level of tax legislation on TP in China is Bulletin No.42 dated 29 June 2016, which requires MNEs to invest more resources to meet the requirements on contemporaneous documentation and reports

Application of centralized approval system to ensure consistency and standardization

To avoid inconsistency in finding comparables and determining different profit levels for similar cases, the State Administration of Taxation has used a national anti-avoidance system Under such system, from 2015 onward, all tax authorities must report and obtain approval from the SAT headquarters when they need to build or close a TP or other anti-avoidance case This helps to standardize audit procedures, avoid interference from local governments and enhance cooperation between state and local tax bureaus

In 2012, the SAT has introduced the “Internal Approval Procedures for Substantial Special Tax Adjustment cases (trial version) Four years later, it released the Internal Procedures for Special Tax Adjustment, in which further clarification of the roles and responsibilities of tax authorities at different level This not only enables tax authorities of different areas to work consistently with each other, but also protect them from risks in enforcing the law by the internal control system in such Internal Procedures

Conclusion of APA Program and MAP Process

China has solutions to eliminate double taxation resulting from TP audits by operating an MAP Process and provide certainty for cross-border taxpayers by putting in place an APA Program From the first bilateral APA with Japan in 2005,

by the end of 2015, China has concluded 51 bilateral APAs and 44 MAP agreement with seven countries (UN, 2017) Controversial issues related to concepts such as location savings, market premiums have been presented and discussed during numerous bilateral negotiations The SAT started to release APA Annual Reports in

2010, till now six annual reports have been publicized This provides taxpayers with guiding information and informs other enterprises and countries of Chinese policy and regulation Further, APA Program helps to save resources of both tax authorities and taxpayers by avoiding several issues arising related to TP

Participation in the OECD Convention on Mutual Administrative Assistance

2017 From time of implementation, there are more than 100 countries able to exchange tax information with Chinese tax authorities As of 22 June of 2017, China has signed the Country-by-Country Multilateral Competent Authority Agreement with 63 countries, including India, Canada, United Kingdom, Japan, Korea, Netherlands, in which agreeing to automatic exchange of CbC reports for MNEs Almost countries have drafted and introduced their national regulations on CbC reports In short, information such as in reporting of related party transactions and contemporaneous documentation, which is required to disclose will be more transparent In addition to that, the exchange tax information between tax authorities

of different jurisdictions will be more extensive and efficient This will empower the Chinese tax authorities to exert more control than before over taxpayers’ information for the purposes of determination of targets for tax audits and participate more actively in global anti-tax avoidance action

1.3.2 India

The regulations of TP, which are based on the AL principle, came into effect from 1 April 2001 The regulations provide that any income arising from an international transaction between associated enterprises shall be computed having regard to the AL price The authority mainly responsible for TP management in India is Directorate of Transfer Pricing, which was established in 2004 Since then, the numbers of cases being referred for tax audit are increasing annually The Directorate cooperates with the National Academy of Direct Taxes in training officials of TP They have been conducting specialized training for officer, including organizing seminars and conferences for sharing experience

Indian regulations introduce a wide range of issues related to TP, such as APAs, safe habour rules, tax examination and audit procedures

Determination of arm’s length price

According to the Indian regulation, the AL price shall be determined by any of the prescribed methods There are five common methods, consisting of Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Transactional Net Margin Method, the Profit Split Method and a residual method named “any other method” appropriate used in India to determine the AL price There is no method with priority, the “most appropriate method” shall be chosen if it provides the most reliable measure of an AL result under certain circumstances In cases there are more than one results in price determined, AL price shall be taken to be at arithmetic mean of such prices If the variation between the arithmetic mean of uncontrolled prices and the pricing of the international transaction under review does not exceed 3 per cent or other notified percentage of such TP, then transfer price will be considered to be at AL In case a transfer price crosses the tolerance limit, the adjustment is made from the central point determined on the basis of the arithmetic mean Indian TP regulations do not mandate use of the interquartile range

Advance pricing agreements

Generally, APA is an effective mechanism for reducing prolonged TP litigation The Indian government introduced APA in 2012, and regulated rollback provision in the Finance Act 2014 Under Indian law, an APA can potential to provide certainty to taxpayers up to 9 years, in which a maximum of 5 years of agreed period of APA and 4 years immediately preceding the first year for which such APA is agreed The law regulates some conditions for applying rollback provision

As of October 2016, there are total of more than 700 APA applications filled

in India, in which 108 APAs are concluded The concluded APAs pertain to various industry sectors like telecom, media, automobiles, IT services, pharma It is understood that recently, APAs have been concluded for banking, information technology and manufacturing industries The APAs have addressed international transactions like provision of services contract manufacturing, interest payments, corporate guarantees, service charges, royalty payments, transactions of Indian headquartered MNE with overseas subsidiaries

Implementing BEPS Action Plans

The OECD, along with G20 countries, launched the BEPS Project in September 2013 to curb aggressive tax planning by MNEs through intra-group transactions Being a part of the G20, India has been an active participant in the BEPS Project and committed to align the Indian TP Regulations with BEPS project recommendations

While the guidelines of Action Plan 13 of the BEPS project are already being incorporated into the Indian TP Regulations, Action Plans 8-10 are likely to find their way in Indian TP Regulations in near future Indian courts/tax authorities are already relying on the relevant principles under the Action Plans, while deciding litigation

After 15 years from its first introduction in 2001, the TP regime is maturing with tax authorities and MNEs finding middle ground of resolving disputes by

collaboration rather than confrontation which breed a stable tax environment This welcome change would prove greatly beneficial to international business community which see a large opportunity in the growing Indian economy

Strengthening Of Dispute Resolution Process

Dispute Resolution Panel was first set up in 2009, when it was welcomed as a step towards facilitating expeditious resolution to TP litigation However, the Panel failed to achieve its desired objective completely

Further, vide an amendment in 2012, tax authorities were allowed to appeal before the Appellate Tribunal against the directions of the Panel This defeated the very purpose of setting up DRP for speedy disposal of disputes Accordingly, in order to revamp the process of Dispute Resolution, Indian Government has recently appointed dedicated Commissioners of Income-tax on the DRP Further, vide an amendment in the 2016 Union Budget, order passed by the Panel are no longer appealable by tax authorities This is definitely a move in the right direction, however a lot more needs to be done to sharpen Dispute Resolution mechanism so that it achieves its stated objectives

Dealing with Intangibles

The Indian tax administration has noticed serious difficulties in determining the rate of royalty charged for the use of brands and trademarks in certain cases In some cases the user had borne significant costs in promoting the brand/trademark, and to promote and develop customer loyalty for the brand/trademark in a new market In these cases, the royalty rate charged by the MNE will depend upon the cost borne by the subsidiary or related party to promote the brand and trademark and to develop customer loyalty for that brand and product In many cases no royalty may be charged by, for example, the local subsidiary in the uncontrolled environment and the subsidiary would require AL compensation for economic ownership of marketing intangible developed by it and for enhancing the value of the brand and trademark owned by parent MNEs in an emerging market such as India

In many cases, Indian subsidiaries using the technical know-how of their parent company have incurred significant expenditure to customize such know-how and to enhance its value by their R&D efforts Costs of activities, such as R&D activities which have contributed in enhancing the value of the know-how owned by the parent company, are generally considered by the Indian TP officer while determining the AL price of royalties for the use of technical know-how

The Indian TP administration has also noted significant TP issues in cases of co-branding of a new foreign brand owned by the parent MNE (a brand which is unknown to a new market such as India) with a popular Indian brand name Since the Indian subsidiary has developed valuable Indian brands in the domestic market over a period of time, incurring very large expenditure on advertisement, marketing and sales promotion, it should be entitled to AL remuneration for contributing to increasing the value of the little known foreign brand through co-branding it with a popular Indian brand and therefore increasing market recognition

Handling Financial Transactions

The Indian TP administration has come across cases of outbound loan transactions where the Indian parent has advanced to its associated entities in a foreign jurisdiction either interest free loans or loans at LIBOR (London Interbank Offered Rate) or EURIBOR (Euro Interbank Offered Rate) The main issue before the TP administration is benchmarking of these loan transactions to arrive at the ALP of the rates of interest applicable on these loans The Indian TP administration has determined that since the loans are advanced from India and Indian currency has been subsequently converted into the currency of the geographic location of the AE, the Prime Lending Rate (PLR) of the Indian banks should be applied as the external CUP and not the LIBOR or EURIBOR rate

A further issue in financial transactions is credit guarantee fees With the increase in outbound investments, the Indian TP administration has come across cases of corporate guarantees extended by Indian parents to its associated entities abroad, where the Indian parent as guarantor agrees to pay the entire amount due

on a loan instrument on default by the borrower The guarantee helps an associated entity of the Indian parent to secure a loan from the bank The Indian TP administration generally determines the ALP of such guarantee under the Comparable Uncontrolled Price Method In most cases, interest rates quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in India for bonds of different credit ratings The difference in the credit ratings between the parent in India and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of Indian bonds is also considered for determination of the AL price of such guarantees

However, the Indian TP administration is facing a challenge due to availability of specialized databases and of comparable transfer prices for cases of complex inter-company loans as well as mergers and acquisitions that involve complex inter-company loan instruments as well as an implicit element of guarantee from the parent company in securing debt