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Globalisation and advanced technologies have facilitated the expansion of multinational corporations to every corner of the world. Besides transactions between NMCs and autonomous companies, it is inevitable that there are a substantial segment of intra-firm transactions within these NMCs. This paper aims at studying issues existed in intra-firm transactions, current standards and regulations applied to such transactions, and development trends for coping with these issues.
Cross border transactions between related parties often called "transfer pricing" transactions are regarded by two governmental agencies in most countries across the world. Two sets of rules, two different mechanisms of tax collection have been currently employed in governing these transactions. This has caused a wide range of issues in respect of intra-firm transactions. These issues are likely to attribute to differing prices determined by tax and customs authorities. There have been enormous efforts from scholars, expertise and policy-makers at both internal and global level to deal with transfer pricing issues. Some opposed the opinions of convergence of two methodologies due to principally different grounds and costly practices. However, potential benefits derived from intra-firm trade facilitation, avoidance of taxpayers' confusion, and consistent use of a uniform methodology could well promote the trend of greater convergence and cooperation. Meantime, practical trends in several countries have undergone towards convergence and cooperation. Encouraging outcomes have been currently achieved in these countries. These trends therefore, must be promoted to facilitate intra-firm trades globally.
"Transfer Pricing" is the term referred to the price chosen to value in intra-firm transactions. Such transactions take place between related companies or associated companies in multinational corporations (MNCs). As customs duties and income taxes are often different between countries, MNCs attempt to take advantage of taxation rates for decreasing total tax burden and increasing profit as a result of distribution of tax liability among related companies. Transfer pricing, consequently becomes an indispensable tool for MNCs' tax avoidance.
It may well be difficult to determine transfer pricing. This could be because this price is possibly driven by non-market forces. Meanwhile, the market forces will regulate and drive commercial relations between independent companies. Transfer pricing applied in intra-firm transactions is regulated by parent companies in which overall profit and other common interests will influence these "controlled" transactions and the determination of transfer pricing. By manipulation of reported transfer pricing, they probably share costs among related groups and reallocate revenue for the purpose of maximizing expected global profit. Difficulties can also result from differing subjects of transactions (goods, services and other intangible properties) and legislations in different jurisdictions.
The sharp increase of intra-firm transactions can be the result of the globalisation and advanced technologies in transportation and communication which make MNCs prevalent and prominent in international trade. Many kinds of branches, subsidiaries are easily placed in new territories as a globally-marketable strategy. Besides traditional transactions between unrelated companies, there are inevitably business relations among these branches, subsidiaries both domestically and internationally. As statistics presented in the US for proving the prevalence of transfer pricing that the transactions between related companies were accounted for nearly 31% of exported goods and 37% of imported goos in the year of 2000. 
Transfer pricing is concerned by both customs and tax authorities.  In cross-border transactions, it is the first tax for consideration and levied for determining customs duties and for assessing income tax. Along with the proliferation of cross border trade by MNCs, customs and tax authorities have paid greater attention to issues concerning transfer pricing for customs purposes, as opposed to customs valuation, although these two rules have similar objectives of determining the arm's length price or fair transaction value.
The arm's length principle (ALP) is a concept that a transfer pricing must be set the same for intra-firm transactions as between two unrelated companies in the same or similar conditions and transactions. This also means that related companies must be treated as unrelated and independent companies. The price used for such intra-firm transactions must be driven by market forces and decided under competitiveness.
Transfer Pricing in international rules
As transfer pricing for tax purposes, most tax administrations are likely to apply international set of standards derived from the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations developed by Organisation for Economic and Cooperation Development (OECD) in 1979 and regularly updated. In these guidelines, the ALP is used as a key element for determining transfer pricing for tax purposes. Many countries may well enact tax and customs legislations comprising the ALP as a vital principle for determining transfer pricing.
Other international rules related to transfer pricing consist of the Articles of the Model Convention with respect to taxes on Income and on Capital (the OECD Model Convention) and the United Nations Model Double Taxation
Convention between Developed and Developing Countries (the UN Model Tax Conventions). The OECD Model Convention promulgated in 1963 encompasses transfer pricing articles. The latter was published in 1979 by United Nations. The latest update of the UN Model Convention was on the year of 2011. There are many similarities between these treaties, for instance the principle of the arm's length specified in the article 9 of both Conventions, but the UN Model Convention is deemed to adapt to agreement between developed and less developed countries. 
However, a viewpoint stated in KMPG materials that there may well be prevalence of fragmented regulations relating to transfer pricing in different jurisdictions.  The OECD guidelines and in many countries' tax legislations provide a number of methods for determining the valuation for tax purposes between related parties consisting of Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM), Comparable Profits Method (CPM), and Profit Split Method (PSM).
On the other hand, the Agreement Implementing Article VII of the General Agreement on Tariffs and Trade or widely known as the World Trade Organisation (WTO) Customs Valuation Agreement (CVA) provides relevant provisions concerning transfer pricing for customs purposes. According to the CVA, there are six methods for assessing valuation for customs purposes, namely Transaction value (TV), Transaction value of identical goods (TVI), Transaction value of similar goods (TVS), Deductive value (DV), Computed value (CV), and Fall-back method (FM). In the light of the CVA, related parties are defined in the article 15 of the Agreement.
Transfer Pricing and Customs Valuation
It is a principally accepted that transfer pricing and customs valuation are both bound by the arm's length principle. In other words, seeking arm's length values are the key purpose of both rules.
The article 1 of the CVA regulates customs value of imported goods as the price actually paid or payable for the goods to be exported to importing countries, subject to some adjustments specified in the article 8 of the present agreement. The use of this valuation is defined as transaction value. Transaction value can be accepted between related parties, as specified in the article 1.2, 'provided that the relationship did not influence the price'. This transaction value should satisfy either the sale's test circumstances or the value test. While the circumstances of sale's test are related to business environment in which commercial transactions take place, the test value is a method for comparing the price declared and other value of identical or similar goods determined by other customs value methods of the CVA in a regulated period of time (often not the same in different jurisdictions). As there is an existent relationship between related parties proved to affect transaction value in some situations, transaction value must not be used to determine the valuation for customs purposes and other alternative methods are employed for determination in the strict sequential order. The ensuing alternative methods comprise transaction value of identical goods, transaction value of similar goods, deductive value, computed value and fall back method. Thus, it may well be the case to denote transaction value as an arm's length price of imported goods.
The principle of the arm's length transactions in transfer pricing is set out in the article 9 of both OECD Model Convention and UN Model Tax Convention. It is applied for goods, services and intangible properties in commercial or financial cross border transactions between related parties. To determine the ALP, a comparison between controlled and uncontrolled transactions is established with subject to operational functioning, assets, risks and other elements. Relevant adjustments will be put in to produce outcomes which can assure comparable transactions with no material differences. Rules are set forth in the OECD guidelines for such a comparison.
Apart from the similarity of sharing similar principles of the arm's length price, these two regimes are likely to have determined differences as following.
It is widely agreed that both customs valuation and transfer pricing share basic definition of related parties. Nonetheless, significant differences probably exist in several jurisdictions. For instance, the relationship between related parties regulated in the US's legislations requires parties to have both formal legal relationship and economic control, while only formal legal relationship is required in most other countries for the determination of related parties and their transactions.
Tax administrations have different motivation from customs authorities. In the sphere of income tax, tax agencies attempt to verify whether or not the likelihood of over-invoicing of imported goods which lead to excessive deductible amount of taxes and a subsequent decrease of taxable income. On the other side, customs agencies desire to raise duties by determining customs value upwards. Take objectives of Internal Revenue Service (IRS) and the Customs and Border Protection for greater clarification that the best interest of the IRS is the higher taxable income, while that of the CBP is the higher customs duties levied on higher customs valuation of imported goods. 
Set of rules
The fair price determined for customs purposes is evaluated by implementation of the CVA and established in each entry of imported goods. Customs authorities can exercise its mandate on imported prices based on a hierarchical methods. If the first method cannot be utilized, the next one must be in use in sequential order. Based on ad valorem basis, the customs duties are the combination of customs valuation and tariffs decided by commodity classification.
Transfer pricing valuation, at the meanwhile, is based on the arm's length price to establish the fair income on an aggregate basis. The methods, additionally, for transfer pricing purposes can be selected without the need of any sequential order. Tax authorities have the right to affect taxable income and allow any tax return filed annually. Currently, the OECD standards are most likely to be employed in many jurisdictions for assessing transfer pricing.
Different valuation methods adopted by tax and customs authorities are clearly specified and compared as following table:
Comparable Uncontrolled Price
Transaction value of identical goods
Transaction value of similar goods
Resale Price Method
Cost Plus Method
Transactional Net Margin Method
Profit Split Method
Other approved methods
(Source: KMPG International)
The CUP method is similar to the TVI and the TVS in terms of the value used in other comparable transactions, subject to some additions or deductions to reach a value appraised in similar sale conditions. Nevertheless, there are several points of differences between the two regimes. Firstly, the TVI and TVS requires comparing the value in a sale at in the same commercial level, the same quantity as the goods being valued. If this cannot be implemented, adjustment will strictly be made (article 2(b)). Meantime, adjustments in CUP are conducted concerning functions and consider other elements, such as risks, assets. Secondly, the origin of imported goods must be the same as the goods being valued in the TVI and TVS, as specified in the article 2.1(a) and 3.1(a). However, there is not such a rule in the CUP. Third, according to the article 9 of the CVA the conversion of currency is needed for assessing customs value and the rate for this conversion must be provided by the country of importation at either the time of export or import. In transfer pricing valuation, this depends on each country's tax legislations. Forth, if there are many comparable price found in the TVI and TVS, the lowest price should be selected. In CUP, the preferred price would be the average one. Fifth, the time to determine transaction are different, TVI and TVS choose the time of export while the CUP opts for the time of sale.
The next comparison is the DV in the CVA and the RPM in the OECD guidelines. They share the same implementation which extracts or deducts a number of costs and profit to determine imported goods. There are some differing elements between two methods. The valid period of time is 90 days before and after the day of importation will be used by the DV for determination of customs value of imported goods (article 5.1(b)). The RPM has another approach and no time limit is used because tax income will determined at the end of financial year. In case of several comparable prices, the DV employs the use of the price at which imported goods are sold at the greatest aggregate (article 5.2), as opposed to the use of average price in the RPM. Another difference is the way two methods assess and evaluate profit to be deducted. The article 5.1(a) or the CVA specifies clearly elements of deductions as a usual costs and general expenses to the DV. The RPM gives greater focus on functions of parties and evaluation of assets and risks.
Another pair of similar methods is the CV and the CPM. These methods are similar because they use exporting prices, subject to others relevant additions. These additions are specified in the article 6.1 of the CVA in respect of the CV method. There is one significant difference that the CV makes the sum of profit and general expenses as a whole, the CPM separates profit and general expenses.
Apart from these above, other methods for determination of transfer pricing of both the CVA and the OECD guidelines completely differ from each other.
The CVA does not specify in details documentation requirements for the determination of valuation. This depends on the declaration and customs regulations of importing countries. In the meanwhile, those requirements for transfer pricing must be detailed and encompass operational functioning, application of transfer pricing method with explanation, analysis.
Time of valuation
Customs valuation of imported goods is determined on a transactional basis, so that the relevant time for determination must be the entry date of importation. Whereas, the valuation of transfer pricing can be decided either on the time of importation (arm's length price-setting) or on the date of tax return filed (arm' length outcome). Furthermore, there are different timeframes between two paradigms relating to making adjustments or auditing. Take an instance in the US, the transfer pricing audit process by the IRS could take long time up to several years. The CBP often complete review process for a period of 90 days from transactional dates. 
Consequences from divergence
After an auditing or adjustments by tax authorities, the transfer pricing is likely to be adjust downward. This is the objective of the tax authorities that they will collect additional tax on increased income. NMCs may well endure double taxation as they pay such an additional tax after adjustments and higher customs duties at the entry of imported goods. This situation will be even exacerbated as NMCs are engaged in large volume and high value cross border related transactions in jurisdictions with high rates of tariff. In addition, the auditing of transfer pricing several years after the transactional date in connection with complex retroactive price adjustment procedures probably discourage NMCs from adjusting previous customs declarations.
Burden of enforcement costs
There are two governmental bodies in parallel to govern the same cross border related transactions which will incur significantly enforcement costs to a government. These competent administrations organise differing mechanisms of tax collection, administer differing valuation regimes with differing sets of rules and differing systems of auditing. Two types of expertise like customs specialists, transfer pricing experts, as a consequent, must be sustained to administer the same transactions. Furthermore, the question required to ascertain the arm's length price for a related transaction is likely to have different answers. This seems to exposes the NMCs to a complicated system of processes and procedures that incur compliance costs to them.
Current approach and practices
Advance pricing agreements (APAs)
APAs were first introduced by the IRS in the US and now regulated in many countries' domestic legislations. They exist under different names as well as different legal forms like legal binding agreements or one-way concessional documents. APAs provide taxpayers with certainty, reduce the risk of double taxation or auditing. In Korea, the International Tax Coordination Law gave into effect the Advance Customs Valuation Arrangement (ACVA) in 2008. It is a type of APAs ensuring related transactions to be avoided audits with the Korea Customs Service (KCS). Taxpayers are encouraged to have the ACVA with the tax authorities for reducing possible conflicts related to transfer pricing.  In Australia, APAs are granted in a formal process established in the Australian Tax Office. Presently, there are about 150 APAs granted or renewed. 
Two methodologies for determination of intra-firm transactions can lead to an overlap. This could be because customs and tax authorities are applying different standards and sets of rules in determination of the arm's length price.
It appears that there is a situation which related parties can avoid customs duties or income tax by reporting transfer pricing for tax purposes higher than customs valuation. The US supplemented the provision of section 1059A in dealing with this situation and only applying to intra-firm transactions. The 1059A regulates that the amount of cost to determine transfer pricing cannot be higher the customs valuation with some allowable adjustments. In addition, no higher transfer pricing compared with customs valuation can be claimed. 
Take another example, the US's importers are allowed to use actual costs in determining customs valuation as they import goods from related sellers. Customs valuation at the time of entry is based on guessed amount due to inexact valuation of imported goods. The price actually paid of payable paid is eventually subject to adjustments imposed by tax authorities or internal accounting mandates. This is likely an evolution towards the cancellation of the overlap by adoption of "annual customs return" like annual income tax return. 
The overlap between two regimes has been identified, however, expected solutions seems not to be reached. Two competent authorities in many countries continue to ascertain the way out. Presently, joint advanced pricing agreements between taxpayers, customs and tax authorities have initiated in the US and Australia. These has been widely agreed to have encouraging outcomes in terms of potential dispute prevention.
Information exchange and joint audit between the two authorities would also be considered as significant fields of cooperation. The availability of relevant data and analytical play a vital role in determination of arm's length prices. Exchange of information is implied in the article 26 of the OECD Model Convention and certain countries' domestic legislations. In Australia, information sharing in relation to transfer pricing issues is implied in an agreement which allow mutual exchange rights of logging in either tax or customs administrations' systems for products or company pricing information. 
Relevant information exchange can assist in identifying and justifying differences in declared valuation of imported goods. This justification is aimed at not affecting either customs duties or income taxes. Especially, audits are most likely to require an enormous exchange of information. Joint audit thus, can be a sound solution.
APAs and other current practices in certain countries can be broadly operationalized, but it is generally accepted that these are less likely to become a long term and consistent strategy in both national and international plane.
The acceptability of transfer price for customs purposes and vice versa is probably another problem. Due to basic differences between methodologies, there is a limited degree of acceptability or useful supports from one to be used by another regime.
Others could be that there has not been any best solution for harmonizing or unifying the two regimes aiming at related transactions currently. The issue of interest conflicts between customs and tax authorities is consistently existed. Dispute resolution and compliance have not been added to the field of possible cooperation.
Transfer pricing is deemed as not tax issues but customs valuation issues. With the proliferation of the NMCs, the issues of transfer pricing could become a significant impediment to cross border intra-firm trades. There would certainly be ongoing researches and studies by many stakeholders towards possible convergence of two methodologies at international level. The findings have just reached at an undesirable level due to extremely complex and broad issues. Internationally agreed standards should be reached to solve the differences in customs and tax methodologies, to avoid taxpayers' confusion and to apply uniform norms in all tax situations. At national level, each country has employed its own policies differing from others in some aspects which depend on its internal circumstances. In awaiting possible internationally agreed norms, convergent approach and cooperation between customs and tax authorities should therefore, be greatly promoted to be in favor of intra-firm transactions.