The review of the Glaxo decision and topical issues in transfer pricing
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Transfer pricing is an important business tool in the modern world. In the modern era of globalisation, it provides management with the opportunity to manipulate prices, pursuing the business objective of maximisation of profits. This in turn allows for increased distribution to the shareholders. From a profit maximisation perspective, this concept is certainly tenable. However, businesses need to pay due consideration to the taxation implications of transfer pricing. While allowing for effective repatriation of profits from a high or low tax jurisdiction to a low or no tax jurisdiction, businesses need to be duly consider the taxation consequences if the revenue authorities establish that the tax base of their country is being depleted by such repatriations. In certain jurisdictions, the statutory powers allows for reconstruction with the existence of a mere suspicion of unacceptable price manipulation. Unlike New Zealand, the statutory framework imposes onerous obligations on the Commissioner to challenge the transfer prices by establishing that the adopted transfer pricing method is not comparable to arms length transactions. Largely, transfer pricing involves a degree of price manipulation between a parent and a subsidiary. Against this background, multi-nationals need to balance this against the social obligations of the citizens of the country. The central issue behind almost all transfer pricing disputes between multinationals and revenue authorities is whether the prices charged is consistent with that of independent and un-associated parties. In saying this, it has to be recognised that certain transactions may have little to no comparable transactions, which constraints the search to substantiate the basis for the pricing. To make this concept workable, the transfer pricing rules in most jurisdictions operate on the basis of treating the parent and the subsidiary as separate entities. While this concept is theoretically sound, practically it is very difficult to “artificially” make the distinction for cross border transactions. Against this practical constraint, multinationals and revenue authorities reliance on commercial databases to corroborate the transfer prices certainly poses more questions. Effectively, the requirement to keep the transfer prices at arms length is discharged through utilisation of a database, designed for purposes other than transfer pricing.