Intra-group transaction pricing.

The Transfer Pricingrefers to a set of rules governing how the value of transactions is determined between companies that belong to the same corporate group but are located in different countries. This mechanism is essential to ensure that intragroup transactions are carried out at market conditions, preventing tax manipulation and ensuring the proper allocation of profits.

The objectives of Transfer Pricing regulations  are to prevent price manipulation aimed at reducing tax liability (by shifting taxable bases from high-tax countries to low-tax jurisdictions), and at the same time to ensure that intragroup transactions comply with thearm’s length principle—the standard that transactions between related parties should be priced as if they were between independent enterprises. These rules also aim to avoid double taxation and promote tax transparency.

Transfer Pricing regulations are governed at the international level by the OECD Guidelines,which set out criteria for determining fair prices in intragroup transactions. In Italy, the relevant rules are set out in Article110, Paragraph 7 of the TUIR,which requires the use of market-comparable prices.

Methods for Determining Prices

To establish the appropriate value of intragroup transactions, several methods are used:

1. Comparable Uncontrolled Price (CUP) Method compares intragroup prices with those of similar transactions between independent companies.
2. Resale Price Method (RPM): based on the resale price of a product, from which a profit margin is subtracted.
3. Cost Plus Method (CPM): applies a profit margin to the costs incurred in providing a good or service.
4. The Transactional Net Margin Method (TNMM): analyzes the net profit margin in relation to comparable transactions.
5. Con il Profit Split Method (PSM) divides the profits from a transaction among the participating entities based on the economic value each contributes.

Tax authorities closely monitor Transfer Pricing practices to prevent tax avoidance. Companies are required to document their intragroup transactions and demonstrate compliance with market principles to avoid tax adjustments and penalties.

A rigorous application of Transfer Pricing rules helps prevent opportunistic behavior and ensures that companies contribute fairly to the tax base in the countries where they operate. With increasing regulatory scrutiny, it is essential for businesses to adopt solid, transparent compliance strategies that minimize the risk of disputes and sanctions.

DTA