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Transfer Pricing: Impact on Trade and Profit Taxation
It is not enough to adopting laws to regulate transfer pricing for which several models exist. The test in implementing the laws lies in developing practical skills and meeting the resource needs within the administration. The administrative regime for regulating transfer pricing should be specialised but also development friendly. Duties and taxes should not be allowed to be evaded, but at the same time the manner of regulating transfer pricing should not act as a disincentive to the flow of foreign investment.
The World Development Report 1999/2000 [World Bank 1999] notes that fragmentation of production processes across international borders is an important new trend, particularly for developing economies. This “slicing up the value chain” involves separate stages of production being conducted in different countries. The reasons are not far to seek. Global trade rules have lowered trade barriers and uncertainties, and have consequently given a boost to global production networks. Phenomenal progress in global transportation and communication has also made management of such global production networks easy.
These developments have also resulted in an increase in intra-firm trade. The World Development Report notes that about one-third of the world trade takes place within global production networks.
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