Transfer pricing: theoretical aspects and practical application

The commercial performance of the company and the amount of CIT depends on the chosen pricing policy on goods (services). The government, on the one hand, is interested in maximizing tax revenue as a key element of its total income and the company, on the other - to minimize tax liabilities. From the transfer pricing mechanisms the amount of about UAH 100 billion stays not taxable each year, resulting in the Ukrainian State Budget loses of about UAH 20-25 billion. In this regard transfer pricing administration is a necessary process. To align the conditions between entities-residents and non-residents, the mechanism for controlling normal and transfer pricing was developed. It is built on the guiding principles of the OECD Transfer Pricing manual and in several countries it is used at the level of standards. Most developed countries adopted in their tax laws provisions that are devoted to transfer pricing, and our national legislation isn’t an exception. Ukrainian and foreign companies apply the mechanism of transfer pricing mainly to avoid some of the expenses, not for the purpose of investing in society as educational projects, health care, youth employment, the development of social and cultural institutions, sports events, and development of infrastructure. However, companies often use transfer pricing not because of a desire to reduce tax burden for profit maximization but to expand their market share, attract highly skilled professionals, for more efficient use of available resources, territorial diversification of risks, minimization of currency risks, technology development, investment attractiveness and other benefits received as a result of the release of working capital. It is important, that the companies resort tax optimization because of the complexities of the tax system, corruption trends, unpredictable and rapid changes in government policy, the ambiguity of interpretations. One of the optimization schemes regarding tax liability on income from the use of intellectual property is ?Double Irish Dutch Sandwich?. This scheme is very popular in the U.S., it is used in such companies as Apple, Facebook, Google, Microsoft, Oracle Corp and Pfizer Inc. A lot of companies have a desire to pass to a cap, and because of this there are abuses and tax evasion. A well-known example - the situation with the company Enron during 1998-2001, which had 881 offshore company and during 4 of the 5 years of its existence, did not pay taxes. Ukrainian companies also take advantage of transfer pricing. For domestic business it is popular to buy subsidiaries or affiliated companies, which are created in countries with low tax rates, or securities of the parent company and receive dividends or royalties in that jurisdiction. The extent of the shortfall by Ukrainian Budget can be estimated from the data of the State Statistics Service of Ukraine. Thus, in 2010 the total volume of export-import operations of Ukrainian companies with non-residents which are located in offshore areas was UAH 36.4 billion. And at the end of 2013, FDI from Cyprus to Ukraine amounted USD 19 billion, representing more than 30% of all FDI in 2013. It is obvious that under the appearance of FDI from these areas with favorable tax climate the revenues that were hidden because of optimization schemes (including transfer pricing) are returning. Transfer pricing is a way for redistributing resources and tax optimization that affects the distribution of income, profits, and risks. Managing transfer pricing is designed to provide better coordination and regulation of intra-firm connections, reducing total costs, increasing employee motivation. The strategic task of the government is to develop methodological aspects of the formation of transfer pricing and organizational scheme of transfer pricing application.