Accounting Q&A · Taxation · Topic 7
Practise 25 questions on residence, treaties, permanent establishments and arm’s-length pricing. Try each question before opening the answer. The examples use hypothetical amounts and rates. Check the rules for your jurisdiction and tax year before applying them.
Worked example
A distributor earns 120,000 revenue and incurs 108,000 operating costs including related-party purchases. Its operating margin is 10%. Compare that figure with suitably adjusted benchmarks before drawing a pricing conclusion.
Key concepts
1. What is tax residence?
A status connecting a person or entity to a jurisdiction under its tax rules.
2. What is source taxation?
Tax imposed because income arises in a jurisdiction under its source rules.
3. How can double taxation arise?
Two jurisdictions can assert tax over the same income.
4. What does a tax treaty do?
It can allocate taxing rights, provide relief and establish cooperation procedures.
5. Does a treaty always remove tax?
Check scope, eligibility and conditions. It may reduce or allocate tax.
6. What is a permanent establishment?
A taxable business presence as defined by the applicable law and treaty.
7. Can an agent create a taxable presence?
Certain activities and authority can trigger a treaty’s agency rules.
8. What is a foreign tax credit?
Relief against domestic tax for eligible foreign tax, subject to limits.
9. Domestic tax is 2,000 and eligible foreign tax is 1,200. What remains if credit is fully usable?
800.
10. What if the credit is capped at 900?
Domestic tax after the credit is 1,100.
Applying the rules
11. What is transfer pricing?
Pricing transactions between associated enterprises.
12. What is the arm’s-length principle?
Assess whether conditions align with those independent enterprises would agree in comparable circumstances.
13. What is functional analysis?
Review functions performed, assets used and risks assumed by the parties.
14. Why read both contracts and actual conduct?
Conduct can show how transactions and risks work in practice.
15. What is a comparable uncontrolled price?
A price in a sufficiently comparable transaction between independent parties.
16. Why adjust comparable prices?
Differences in terms, volumes or markets can affect the comparison.
17. What does the resale price method start with?
The independent resale price, adjusted for an appropriate gross margin and relevant costs.
18. What does cost plus analyse?
An appropriate cost base and arm’s-length markup.
19. Costs are 40,000 and the illustrative markup is 8%. What is the charge?
43,200.
Review questions
20. What does the transactional net margin method test?
A net profit indicator relative to a suitable base, using comparables.
21. Operating profit is 15,000 on revenue of 150,000. What is the sales margin?
10%.
22. What is an advance pricing arrangement?
A process for agreeing specified transfer pricing criteria in advance under applicable rules.
23. What is mutual agreement procedure?
A treaty process in which competent authorities address qualifying tax disputes.
24. What records support an intercompany service?
Contracts, evidence of services, beneficiaries, costs and the pricing basis.
25. What should a cross-border review check?
Residence, source, taxable presence, withholding, treaty relief and documentation.
Official reference for International Taxation and Transfer Pricing.