Internal Transfer Pricing; Be Careful, Very Careful

Transfer pricing, along with its many implications, has long been a contentious tax issue.

Yet, while conventional wisdom has it that transfer pricing is largely an offshore phenomenon involving related offshore parties, it frequently creates problems when it is conducted domestically.

The applicable legislation is the Income Tax Act’s section 31, which deals with transfer pricing in international transactions. It uses the terms ‘connected person’ and ‘related offshore parties’, the definitions of which can be ambiguous.

Traditional transfer pricing problems arise when a local company is undercharging its supply of goods and services to connected offshore parties, or is being overcharged for the goods and services it is acquiring from connected offshore parties, thereby shifting taxable profits to other tax jurisdictions.

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