Transfer pricing

About Transfer Pricing


About Transfer Pricing


In the transfer pricing context, business restructurings are defined as the cross-border redeployment by a multinational enterprise (“MNE”) of functions, assets and/or risks. They are not a new phenomenon as MNEs constantly need to adapt their business models to a dynamic commercial environment. They can involve a transfer of something of value (e.g. assets) and/or the termination or substantial renegotiation of existing commercial arrangements within an MNE group. They can have a dramatic impact on the allocation of an MNE’s taxable profits among the countries in which it operates.


In 2005, in recognition of the widespread phenomenon of business restructurings among MNEs, of the tax issues they raise, and of the significant uncertainty arising for business as well as for governments and risks of double taxation or double non taxation due to the lack of international guidance in this area, the OECD started a project to develop guidance on the transfer pricing aspects of business restructurings.

This project benefitted from significant input from the business community. A public invitation to comment  was released on the Internet. A Business Advisory Group was set up, consisting of a dozen representatives from the business community. A discussion draft was released in September 2008, which attracted detailed contributions  from thirty-seven organisations. These contributions were discussed by the OECD and commentators during a two-day consultation meeting in June 2009.


This work resulted in a new Chapter IX being incorporated into the Transfer Pricing Guidelines. Chapter IX is a consensus document that was approved by the Council of the OECD on 22 July 2010. It contains guidance on the transfer pricing aspects of risk allocations; the determination of an arm’s length compensation for the restructuring itself and for post-restructuring transactions; and the recognition of the actual restructuring transactions undertaken. The OECD released a response to the main public comments received on the September 2008 discussion draft.


The application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in comparable transactions between independent enterprises, referred to as a “comparability analysis”. The Transfer Pricing Guidelines (“TPG”) contain guidance on comparability analyses and a description of five transfer pricing methods which can be used to establish whether the conditions of a transaction between associated enterprises satisfy the arm’s length principle.

Building on the experience acquired by tax administrations and taxpayers since the TPG were released in 1995, the 2010 revision of the TPG contains new guidance on how to perform comparability analyses in practice, on the selection of the most appropriate transfer pricing method to the circumstances of the case, and on how to apply in practice two of the OECD-approved transfer pricing methods, referred to as “transactional profit methods”, namely the transactional net margin method and the transactional profit split method.


The process of revising Chapters I-III of the TPG benefitted from input from NOEs and from extensive consultations with the business community. Open invitations to comment on issues in relation to comparability and profit methods   were released in 2003 and 2006; two series of Issues notes on comparability and on profit methods were released for public comment in May 2006 and January 2008; a two-day consultation with commentators was held in November 2008 and a proposed revision of Chapters I-III of the TPG was released for public comment in September 2009.


The revised Chapters I-III of the TPG  were approved by the Council of the OECD on 22 July 2010. Recognising the importance and quality of the contributions received from the business community, the Committee on Fiscal Affairs released a response to shed light on how the main public comments were dealt with in the final report.


Under the authorised OECD approach resulting from that project, the PE is first hypothesised as a distinct and separate enterprise, through a functional and factual analysis to determine its functions and attribute to it assets, risks and free capital.


On 17 July 2008, the OECD Council approved the release the Report on the Attribution of Profits to Permanent Establishments . The Report includes a preface and four Parts. Part I sets out general considerations for attributing profits to permanent establishments, regardless of the business sector in which they operate. 

The latter three Parts of the Report elaborate upon the application of this approach to PE of enterprises operating in the financial sector, where doing business in permanent establishment form is especially common. Part II describes the application of the approach to enterprises carrying on a banking business through a permanent establishment. Part III addresses the situation of permanent establishments of enterprises carrying on global trading in financial instruments.


Part IV deals with the application of the approach to PE of enterprises carrying on insurance activities.

This final Report replaces all previous drafts of the various Parts, including the interim version of Parts I - III published in December 2006 and the discussion draft of Part IV published in August 2007.

The Committee on Fiscal Affairs has undertaken to adopt a two track approach to implementation of the Report in order to provide tax administrations and taxpayers with maximum certainty as to how profits should be attributed to permanent establishments under both existing and future treaties.


A revised Commentary on the current version of Article 7, which includes those conclusions of the Report that do not conflict with the prior Commentary, has been included in the 2008 update to the Model Tax Convention . In order to reflect the full conclusions of the Report, work has also begun on a new version of Article 7, to be included in the next update to the Model Tax Convention and to be used in the negotiation of new treaties and of amendments to existing treaties. A discussion draft of the new Article 7  was released on 7 July 2008.


A large proportion of world trade consists in cross-border transactions within multinational enterprises (“MNEs”), where branches or subsidiaries of the same MNE group exchange goods, services or intangibles. These transactions, referred to as “controlled transactions”, are not subject to the same market forces as transactions between independent enterprises. There is a risk that the taxable profits derived from controlled transactions may not reflect the economic contributions made by the parties in each country involved.


The international consensus on transfer pricing is the arm’s length principle, according to which the profits made by an associated enterprise from controlled transactions should be comparable to the profits that it would have realised if it had been dealing in comparable conditions with an independent enterprise. The arm’s length principle is embodied in Article 9 of the OECD Model Tax Convention and in the domestic legislation of OECD and many non-OECD economies. The Transfer Pricing Guidelines provide guidance on its application.


The application of the arm’s length principle helps governments ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. It also limits the risks of economic double taxation that may result from a dispute between two countries on the determination of the remuneration for cross-border transactions between associated enterprises.


The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations were adopted by the OECD Council in their original version in 1995 and have since been amended and supplemented with new chapters and annexes to address the challenges posed by the globalised and increasingly complex economic context in which MNEs operate. The most recent update was approved by the OECD Council in July 2010.





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