TRANSFER PRICING AS A TOOL OF TAX OPTIMIZATION: INTERNATIONAL LEGAL FRAMEWORK FOR ITS APPLICATION

Abstract

The article examines transfer pricing as a tool of tax optimization used by multinational groups of companies through the prism of the international legal framework governing its application. The article substantiates that transfer pricing is not, in itself, an unlawful phenomenon, since it objectively ensures the internal allocation of income, expenses, profits and risks among related companies. At the same time, it demonstrates that, in the absence of proper tax and legal control, transfer pricing may be used as a mechanism of aggressive tax planning aimed at the artificial shifting of profits to jurisdictions with a lower level of taxation.

It is determined that the key international legal criterion for the legitimacy of transfer pricing is the arm’s length principle, enshrined in Article 9 of the OECD Model Tax Convention and detailed in the OECD Transfer Pricing Guidelines. The article shows that this principle requires an assessment not only of the formal price of a transaction, but also of its economic substance, the functional profile of the parties, the assets used, the risks assumed, the actual conduct of the participants and their real contribution to value creation. Particular attention is paid to the approaches developed under the BEPS Action Plan, according to which profits should be taxed where economic value is actually created.

The article characterizes the main methods for determining whether transfer prices correspond to the arm’s length level: the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method and the profit split method. It is concluded that the choice of method should depend on the economic nature of the controlled transaction, the availability of comparable data, the possibility of adjustments and the degree of integration of the business model. The article argues that modern transfer pricing is gradually shifting from formal price control to a comprehensive analysis of value creation, economic substance and proper documentary substantiation of intra-group transactions.