Abstract

According to the arm’s length principle conditions of transactions between associated enterprises should not differ from those agreed in similar circumstances by independent parties. To comply with the above rule many capital groups develop an internal TP policy determining the profitability of particular companies, which would have been obtained if comparable transactions were realized by unrelated entities. If – at the end of a reporting period/ tax year – actual profits earned by companies within the group differ from the profits assumed, appropriate adjustments are made (documents increasing or decreasing profitability are issued and cash is transferred between taxpayers in order to reflect the market conditions). This article discusses tax consequences of the above described transfer pricing adjustments from the perspective of corporate income tax and value added tax.