OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

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Irregular
ISSN :
2076-9717 (online)
ISSN :
2076-9709 (print)
DOI :
10.1787/20769717
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The role of multinational enterprises (MNEs) in world trade has increased dramatically over the last 20 years. For MNEs, specific problems regarding taxation arise at both policy and practical levels. At the policy level, countries need to reconcile their legitimate right to tax the profits of a taxpayer based upon income and expenses that can reasonably be considered to arise within their territory with the need to avoid the taxation of the same item of income by more than one tax jurisdiction. At a practical level, the taxing rights that each country asserts depend on whether the country uses a system of taxation that is residence-based, source-based, or both. OECD member countries have chosen a separate entity approach as the most reasonable means for achieving equitable results and minimising the risk of unrelieved double taxation. Thus, each individual group member in an MNE is subject to tax on the income arising to it (on a residence or source basis). To ensure the correct application of the separate entity approach, OECD member countries have adopted the arm's length principle, under which the effect of special conditions on the levels of profits should be eliminated.

These Transfer Pricing Guidelines focus on the application of the arm's length principle to evaluate the transfer pricing of associated enterprises. The Guidelines are intended to help tax administrations (of both OECD member countries and non-member countries) and MNEs by indicating ways to find mutually satisfactory solutions to transfer pricing cases, thereby minimizing conflict among tax administrations and between tax administrations and MNEs and avoiding costly litigation. The Guidelines analyse the methods for evaluating whether the conditions of commercial and financial relations within an MNE satisfy the arm's length principle and discuss the practical application of those methods. They also include a discussion of global formulary apportionment. These Guidelines are updated from time to time.

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OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010

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Author(s):
OECD
Publication Date :
16 Aug 2010
Pages :
372
ISBN :
9789264090187 (PDF) ; 9789264090330 (print)
DOI :
10.1787/tpg-2010-en

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The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on the application of the "arm’s length principle", which is the international consensus on transfer pricing, i.e. on the valuation, for tax purposes, of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, transfer pricing is high on the agenda of tax administrators and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdictions and that the tax base reported by MNEs in their respective countries reflect the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of an arm’s length remuneration for their cross-border transactions with associated enterprises.

After having been originally published in 1979, the OECD Transfer Pricing Guidelines were approved by the OECD Council in their original version in 1995. A limited update was made in 2009, primarily to reflect the adoption, in the 2008 update of the Model Tax Convention, of a new paragraph 5 of Article 25 dealing with arbitration, and of changes to the Commentary on Article 25 on mutual agreement procedures to resolve cross-border tax disputes. In the 2010 edition, Chapters I-III were substantially revised, with new guidance on: the selection of the most appropriate transfer pricing method to the circumstances of the case; the practical application of transactional profit methods (transactional net margin method and profit split method); and on the performance of comparability analyses. Furthermore, a new Chapter IX, on the transfer pricing aspects of business restructurings, was added. Consistency changes were made to the rest of the Guidelines.

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    Foreword
    These Guidelines are a revision of the OECD Report Transfer Pricing and Multinational Enterprises (1979). They were approved in their original version by the Committee on Fiscal Affairs on 27 June 1995 and by the OECD Council for publication on 13 July 1995.
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    Preface
    The role of multinational enterprises (MNEs) in world trade has increased dramatically over the last 20 years. This in part reflects the increased integration of national economies and technological progress, particularly in the area of communications. The growth of MNEs presents increasingly complex taxation issues for both tax administrations and the MNEs themselves since separate country rules for the taxation of MNEs cannot be viewed in isolation but must be addressed in a broad international context.
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    Glossary
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    The Arm's Length Principle
    This Chapter provides a background discussion of the arm's length principle, which is the international transfer pricing standard that OECD member countries have agreed should be used for tax purposes by MNE groups and tax administrations. The Chapter discusses the arm's length principle, reaffirms its status as the international standard, and sets forth guidelines for its application.
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    Transfer Pricing Methods
    Parts II and III of this chapter respectively describe "traditional transaction methods" and "transactional profit methods" that can be used to establish whether the conditions imposed in the commercial or financial relations between associated enterprises are consistent with the arm's length principle. Traditional transaction methods are the comparable uncontrolled price method or CUP method, the resale price method, and the cost plus method. Transactional profit methods are the transactional net margin method and the transactional profit split method.
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    Comparability Analysis
    General guidance on comparability is found in Section D of Chapter I. By definition, a comparison implies examining two terms: the controlled transaction under review and the uncontrolled transactions that are regarded as potentially comparable. The search for comparables is only part of the comparability analysis. It should be neither confused with nor separated from the comparability analysis.
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    Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes
    This chapter examines various administrative procedures that could be applied to minimise transfer pricing disputes and to help resolve them when they do arise between taxpayers and their tax administrations, and between different tax administrations. Such disputes may arise even though the guidance in these Guidelines is followed in a conscientious effort to apply the arm’s length principle. It is possible that taxpayers and tax administrations may reach differing determinations of the arm’s length conditions for the controlled transactions under examination given the complexity of some transfer pricing issues and the difficulties in interpreting and evaluating the circumstances of individual cases.
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    Documentation
    This chapter provides general guidance for tax administrations to take into account in developing rules and/or procedures on documentation to be obtained from taxpayers in connection with a transfer pricing inquiry. It also provides guidance to assist taxpayers in identifying documentation that would be most helpful in showing that their controlled transactions satisfy the arm’s length principle and hence in resolving transfer pricing issues and facilitating tax examinations.
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    Special Considerations for Intangible Property
    This chapter discusses special considerations that arise in seeking to establish whether the conditions made or imposed in transactions between associated enterprises involving intangible property reflect arm’s length transactions. Particular attention to intangible property transactions is appropriate because the transactions are often difficult to evaluate for tax purposes. The chapter discusses the application of appropriate methods under the arm’s length principle for establishing transfer pricing for transactions involving intangible property used in commercial activities, including marketing activities.
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    Special Considerations for Intra-Group Services
    This chapter discusses issues that arise in determining for transfer pricing purposes whether services have been provided by one member of an MNE group to other members of that group and, if so, in establishing arm’s length pricing for those intra-group services. The chapter does not address except incidentally whether services have been provided in a cost contribution arrangement, and if so the appropriate arm’s length pricing, i.e. where members of an MNE group jointly acquire, produce or provide goods, services, and/or intangible property, allocating the costs for such activity amongst the members participating in the arrangement. Cost contribution arrangements are the subject of Chapter VIII.
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    Cost Contribution Arrangements
    This chapter discusses cost contribution arrangements (CCAs) between two or more associated enterprises (possibly along with independent enterprises). There are many types of CCAs and this chapter does not intend to discuss or describe the tax consequences of every variation. Rather, the purpose of the chapter is to provide some general guidance for determining whether the conditions established by associated enterprises for a CCA are consistent with the arm’s length principle. The tax consequences of a CCA will depend upon whether the arrangement is structured in accordance with the arm’s length principle according to the provisions of this chapter and is adequately documented.
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    Transfer Pricing Aspects of Business Restructurings
    There is no legal or universally accepted definition of business restructuring. In the context of this chapter, business restructuring is defined as the cross-border redeployment by a multinational enterprise of functions, assets and/or risks. A business restructuring may involve cross-border transfers of valuable intangibles, although this is not always the case. It may also or alternatively involve the termination or substantial renegotiation of existing arrangements. Business restructurings that are within the scope of this chapter primarily consist of internal reallocation of functions, assets and risks within an MNE, although relationships with third parties (e.g. suppliers, sub-contractors, customers) may also be a reason for the restructuring and/or be affected by it.
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    Annex to the OECD Transfer Pricing Guidelines
    In July 1995, the OECD Council approved for publication the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("the Guidelines"), submitted by the Committee on Fiscal Affairs ("the Committee"). At the same time, the OECD Council endorsed the Committee’s recommendation that the Guidelines be reviewed and updated periodically as appropriate based upon the experience of member countries and the business community with the application of the principles and methods set forth in the Guidelines.
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    Annex I to Chapter II. Sensitivity of Gross and Net Profit Indicators

    See Chapter II, Part III, Section B of these Guidelines for general guidance on the application of the transactional net margin method.

    The assumptions about arm’s length arrangements in the following examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases of particular industries. While they seek to demonstrate the principles of the sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case.

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    Annex II to Chapter II. Example to Illustrate the Application of the Residual Profit Split Method

    See Chapter II, Part III, Section C of these Guidelines for general guidance on the application of the profit split method.

    The adjustments and assumptions about arm’s length arrangements in the examples that follow are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases or particular industries. While they seek to demonstrate the principles of the Sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case.

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    Annex III to Chapter II. Illustration of Different Measures of Profits When Applying a Transactional Profit Split Method

    See Chapter II, Part III, Section C of these Guidelines for general guidance on the application of the transactional profit split method.

    The assumptions about arm’s length arrangements in the following examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases of particular industries. While they seek to demonstrate the principles of the sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case.

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    Annex to Chapter III. Example of a Working Capital Adjustment

    See Chapter III, Section A.6 of these Guidelines for general guidance on comparability adjustments.

    The assumptions about arm’s length arrangements in the following examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases of particular industries. While they seek to demonstrate the principles of the sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case.

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    Annex to Chapter IV. Guidelines for Conducting Advance Pricing Arrangements under the Mutual Agreement Procedure ("MAP APAs")
    Advance Pricing Arrangements ("APAs") are the subject of extensive discussion in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations at Chapter IV, Section F.
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    Annex to Chapter VI. Examples to Illustrate the Guidance on Intangible Property and Highly Uncertain Valuation

    The following three examples illustrate the application of the principles concerning arm’s length pricing when valuation of transferred intangible property is highly uncertain at the time of the transaction. See paragraphs 6.28-6.35.

    The adjustments and assumptions about arm’s length arrangements in the examples that follow are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases or particular industries. While they seek to demonstrate the principles of the Sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case.

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    Appendix. Recommendation of the Council on the Determination of Transfer Pricing between Associated Enterprises [C(95)126/Final]
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