An Overview of Transfer Pricing – UN Model Convention


The UN Model Convention gives a brief outline on the subject of Transfer Pricing by addressing the practical issues, concerns surrounding it, and the approach taken by the developing countries.

The transfer pricing determines the income of two or more parties involved in cross border transaction. Thus, the concept underlying the transfer pricing shapes the tax base of the countries that are involved in the cross border transactions.

The issue of cross border transactions generally involves the countries’ tax jurisdiction, allocation and the valuation. Therefore, when a tax jurisdiction from one country taxes the MNE Group, it has an effect on the tax base of another country.

Jurisdictional issues

The jurisdictional issues brings a new spectre to the transfer pricing issue where MNE’s manipulates to shift profits in order to reduce the aggregate tax burden of the multinational group. It is important to note that the aim of reducing taxation is an important key. This is in order to set the transfer prices for intra-group transactions, whereby it can be the only contribution factor to the transfer pricing policies.

Despite the obvious motivated issue to reduce the multinational group’s taxation, i.e. by shifting profits from a high tax countries to relatively lower tax countries via the intra-group trade, the transfer pricing related issue throws an open hot issue, the complexities, and the magnitude of the problems that are often faced the tax administrations.

Allocation issues

MNE shares common resources and overheads. From its perspective, these resources are required to be allocated in the most optimal manner. However from the government’s perspective, the allocation of resources (i.e. income and cost) from MNE is required to be addressed for taxation purposes. Despite between some countries, there may be a taxation dispute in terms of deciding the allocation of cost and resources towards maximizing the tax base in respective nation.

Valuation issues

Apart from the allocation of resources, valuation is the key issue of transfer pricing, i.e. the valuation of intra-firms transfers. The integration of the entities contributes to the ability to exploit international differentials and utilized the economies of integration that are not made easily available to the domestic firms.

Generally, the tension that underlies between the common goals of the MNEs and overall social goals of the developing nation is perceived to be the responsibility of the MNEs. The utilization of the resources increases the profits. This however can seem to be in contrast with the social, economic and political consideration of the countries. With so many complexities forces at hand, it is evidently clear as to why the discussion of international taxation is an open-ended problem with transfer pricing at its heart.


Transfer pricing regulations are essential for the countries in order to protect the taxation base, eliminate the double taxation and to enhance the cross border trade.


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