1. The Significance of Transfer Pricing in Today’s Economy Joel Lachlan Cooper International Tax Specialist jcooper3@ifc.org

2. What is Transfer Pricing? The Significance of Transfer Pricing in Today’s Economy2  ”The amount charged by one segment of an organization for a product or service that it supplies to another segment of the same organization” (Horngren and Sundem, 1993)  The term is typically used to describe ‘transfer pricing’ for direct taxation purposes: –Associated parties –Arm’s length principle –Comparability –Transfer pricing methods  Transfer pricing is a ‘neutral concept’

3. Significance of MNE Groups The Significance of Transfer Pricing in Today’s Economy3  Number of foreign affiliate firms has increased 6 fold over the last 2 decades (UNCTAD WIRs)  Of the world's 100 largest economic entities in 2012, 40 (40%) are corporations (Global Trends, 2013)  A substantial portion of international trade takes place within MNE Groups. Various figures are often quoted:  30% (UNCTAD, 1999)  60% (OECD, 2013)  UNCTAD estimates that around 80% of global trade (in terms of gross exports) is linked to the international production networks of TNCs

4. Proliferation of Transfer Pricing Rules The Significance of Transfer Pricing in Today’s Economy4  Identified as a development priority for developing countries  Exponential growth of countries with “effective” transfer pricing rules :  Central to G20-endorsed, OECD “base erosion and profit shifting” action plan (BEPS)

5. Global (Centralized) Business Models The Significance of Transfer Pricing in Today’s Economy5  MNE Groups have increasingly restructured their business operations in order to maximize synergies, reduce costs (including tax) and increase efficiency  This typically has involved the centralization of certain functions, assets and risks in principal entities  This has had a profound impact on international trade

6. Importance of Intangibles The Significance of Transfer Pricing in Today’s Economy6  Investment in “intangibles” has increased dramatically over the past four decades. Consumer behavior has changed and business has adapted (and vice versa).  Estimated that the preponderant form of wealth worldwide is intangible capital (World Bank)  Intellectual property accounts for more than 50% of the value of many public companies (brandchannel.com) (Source: Means, Schneider, “Meta-capitalism”, 2000)

7. Intangibles, MNE Groups and Trade: FMCG Industry The Significance of Transfer Pricing in Today’s Economy7 (Source: Oxfam, Behind the Brands )

8. Transfer Pricing is a key driver of MNE pricing The Significance of Transfer Pricing in Today’s Economy8  “the tax requirements of transfer pricing play a prominent role in the multinational enterprise’s decision-making process” (Cools, 2003)  Recent survey by EY of MNE groups across 26 countries found:  Only 21% reported that they took customs issues fully into account, and  Only 27% said they took VAT issues fully into account when making transfer pricing decisions.