PurposeIn transfer pricing (TP) methods, especially when based on margins, accounting indicators are of paramount relevance to assess the profitability of firms, and to compare such indicators to samples of similar companies. The purpose of this paper, drawing on the legal research method, is to discuss the following questions: when using the transactional net margin, quite common in TP tax reporting, does the new (IFRS-based) Portuguese financial accounting system produce profit level indicators that are closer to the underlying reality that TP aims to capture, or are these profit level indicators of a lower quality than before?Design/methodology/approachThe methodology used in the paper draws on legal research. The hermeneutical and evaluative approaches are used to answer the research question. The legal research method is often criticized by not making the empirical sciences’ type of generalizations, since many problems are, by nature, related to national legal systems and, therefore, proposed solutions are not valid outside a specific territory. However, given the nature of the accounting and tax issues identified and discussed in the paper the topic is relevant outside Portugal, given the widespread adoption of IFRS-based accounting systems and the multinational impact of TP principles’ and legislation.FindingsThe main conclusion is that the new accounting regime has a significant potential for increasing uncertainty and compliance costs in the area of TP, given the nature of operating income adopted in the new IFRS-based system. As such, taxpayers and tax authorities (TA) and tax courts will have to allocate more resources to an already complex and uncertain fiscal area. A careful analysis of non-recurrent items is now mandatory, given the increased flexibility and the amalgamation of recurring and non-recurring accounting items that can have a pernicious influence in TP tax compliance. The answer to the research question is that the new accounting system produces operating margins that, when used as profit level indicators in TP, are of lower quality.Practical implicationsTaking into account the aim of this study, the discussion of a Portuguese particular feature of corporate financial information and tax system can highlight useful policy points to a broader audience. Many OECD countries face a dire situation in budgetary terms. Therefore, given the pressure to increase tax receipts, TP issues can shed some light on solutions being applied in other countries, and enhance awareness of corporate tax policy points. Directive 2013/34/EU gives Member States some accounting flexibility (e.g. in the design of the income statement). Therefore, the authors would argue for a new design of the SNC’s income statement by the Portuguese legislators. The analysis also argues for a broader level of coordination and consultation between accounting standard setters and TA, in areas where a strong link exists between book and tax income.Originality/valueThe link between IFRS-based account systems and TP tax issues is not, to the best of the authors knowledge, a widely researched topic Thus, the paper adds value to the discussion related to book-tax relation in the specific area of transfer price profit level indicators. It finds a divergent path between the economic reality that TP tries to capture and a concept of operating margin that is affected by non-recurring and peripheral transactions.
EuroMed Journal of Business – Emerald Publishing
Published: Jul 3, 2017