TPguidelines

Governments may exert control on prices in a wide variety of ways ranging from simple exhortation through wages control, production subsidies, etc. to direct statutory control of prices. These controls have, in general, to be seen however as conditions of the market in that particular country. Normally it appears to be the final price to the consumer which is the subject of any direct control but the control may operate on prices earlier in the chain of transactions bringing the goods to the consumer’s market. But at whatever stage the control is imposed it will present a problem for tax authorities in deciding what effect the control can be regarded as exerting on the prices paid at the prior stages in the supply of the goods to the market. MNEs may in practice make no adjustments in their transfer prices to take account of s\ich controls, leaving the final seller to suffer any limitation of profit which results, or they may charge prices which share the burden in some way between the final seller and the production organisation. The question which tax authorities have to ask in examining the transfer prices charged in such cases is whether independent parties could be expected to have fixed the prices in the same manner in such circumstances. While the natural assumption might be that, in the arm’s length situation, a seller subject to price controls would not be able to persuade his supplier to moderate his prices, there could be circumstances in which an independent supplier would be ready to do this rather than lose some or all of the business, so that the possibility cannot be ignored. On the other hand, when it is established for example that the products concerned are actually sold on comparable free markets (and under comparable conditions) at significantly higher prices leading to corresponding higher profits, the lower profits of the enterprise in the country with price control will most probably be due to that price control, and to that extent no profit adjustment for tax purposes would be justified. Quite obviously a country with price control cannot easily expect that enterprises selling goods under control would make profits comparable to those which could be realised if no price control existed.