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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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