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.

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.

This chapter provides a detailed description of traditional transaction methods that are used to apply the arm's length principle. These methods are the comparable uncontrolled price method or CUP method, the resale price method, and the cost plus method.

Part B of this chapter provides a discussion of other approaches that might be used to approximate arm's length conditions when traditional transaction methods cannot be reliably applied alone or exceptionally cannot be applied at all. The other approaches are referred to in the discussion here as "transactional profit methods," i.e. methods that examine the profits that arise from particular transactions among associated enterprises. The only profit methods that satisfy the arm's length principle are those that are consistent with the profit split method or the transactional net margin method as described in these Guidelines. In particular, so-called "comparable profits methods" or "modified cost plus/resale price methods" are acceptable only to the extent that they are consistent with these Guidelines. Part C discusses an approach that cannot reliably approximate arm's length conditions: global formulary apportionment. OECD member countries reiterate their support for the arm's length principle and so reject the use of global formulary apportionment.

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 this Report 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.

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.

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 dealings. 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. It also discusses specific difficulties that arise when the enterprises conducting marketing activities are not the legal owners of marketing intangibles such as trademarks and trade names. Cost contribution arrangements among associated enterprises for research and development expenditures that may result in intangible property will be discussed in Chapter VIII.

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.

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. This chapter does not resolve all significant issues regarding the administration and tax consequences of CCAs. For example, further guidance may be needed on measuring the value of contributions to CCAs, in particular regarding when cost or market prices are appropriate, and the effect of government subsidies or tax incentives (see paragraphs 8.15 and 8.17). Further development might also be useful regarding the tax characterisation of contributions, balancing payments and buy-in/buy-out payments (see paragraphs 8.23, 8.25, 8.33 and 8.35). Additional work will be undertaken as necessary to update and elaborate this chapter as more experience is gained in the actual operation of CCAs.