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.