All posts by MYTransferPricing

Transfer Pricing Methods

In practice, when determining the arm’s length price of a transaction – the key question that a transfer pricing analyst would ask is how to apply the arm’s length principle? There are several transfer pricing methods that exists to provide a conceptual framework in determining the arm’s length price.

These methods directly and indirectly relies on the comparable profit margin of similar transactions. The information may be derived from an internal comparable (i.e. similar uncontrolled transaction between the entity and 3rd party) or external comparable (i.e. involving independent parties within the same market / industry).

There are five major transfer pricing methods

  • Comparable Uncontrolled Price (CUP)
  • Resale Price Method
  • Cost Plus Method
  • Profit Split Method
  • Transactional Net Margin Method

The first three method mentioned above are often referred to as the traditional transaction methods, where the remaining last two methods as the profit-based methods. All of these methods are widely used and accepted by the national tax authorities.

Note: Under the USA regulations, there is an additional transfer pricing method which is applicable at the global level of operations. The additional method is referred to as the Comparable Uncontrolled Transactions (CUT) method. This method is similar applied to CUP method. It determines the arm’s length royalty rate for an intangible by comparing the uncontrolled transfers  of comparable intangible property in comparable circumstances.


United Nations Practical Manual on Transfer Pricing for Developing Countries (2017)


The United Nation Practical Manual on Transfer Pricing for Developing Countries was launched and distributed in digital format on 7th April 2017. The TP Manual provides a great assistance to the developing countries to counter and mitigate the risks of profit shifting.

The updated version adopted a new format. The manual is divided into four (4) parts for better clarity and understanding:

  • Part A: This section related to the Transfer Pricing in a global environment
  • Part B: The guidance on design principles and policy considerations
  • Part C: The practical implementation of a transfer pricing regime in developing countries; and
  • Part D: Country practices. This section includes other statements updated and presented by Brazil, India, China and South Africa.

Apart from its presentations and changes to the manual, the 2nd edition of the UN Transfer Practical Manual on Transfer Pricing also includes some new chapters on intra-group services, cost contribution arrangements, the treatment of intangibles, significant updates of other chapters, etc.

In short, this is a timely and essential update provided by the United Nations for the developing countries whom wishes to adopt, implement or further improve the transfer pricing regulations.


United Nation on Practical Transfer Pricing issues

This blog essentially shares the materials prepared by the Members of the United Nations Tax Committee’s Subcommittee on the Practical Transfer Pricing issues.

According to the, United Nation released a revised and updated manual 2017 that is designed to give concrete advice to the developing nations on administering transfer pricing laws.

For further information, please click here.


An Overview of Transfer Pricing – UN Model Convention


The UN Model Convention gives a brief outline on the subject of Transfer Pricing by addressing the practical issues, concerns surrounding it, and the approach taken by the developing countries.

The transfer pricing determines the income of two or more parties involved in cross border transaction. Thus, the concept underlying the transfer pricing shapes the tax base of the countries that are involved in the cross border transactions.

The issue of cross border transactions generally involves the countries’ tax jurisdiction, allocation and the valuation. Therefore, when a tax jurisdiction from one country taxes the MNE Group, it has an effect on the tax base of another country.

Jurisdictional issues

The jurisdictional issues brings a new spectre to the transfer pricing issue where MNE’s manipulates to shift profits in order to reduce the aggregate tax burden of the multinational group. It is important to note that the aim of reducing taxation is an important key. This is in order to set the transfer prices for intra-group transactions, whereby it can be the only contribution factor to the transfer pricing policies.

Despite the obvious motivated issue to reduce the multinational group’s taxation, i.e. by shifting profits from a high tax countries to relatively lower tax countries via the intra-group trade, the transfer pricing related issue throws an open hot issue, the complexities, and the magnitude of the problems that are often faced the tax administrations.

Allocation issues

MNE shares common resources and overheads. From its perspective, these resources are required to be allocated in the most optimal manner. However from the government’s perspective, the allocation of resources (i.e. income and cost) from MNE is required to be addressed for taxation purposes. Despite between some countries, there may be a taxation dispute in terms of deciding the allocation of cost and resources towards maximizing the tax base in respective nation.

Valuation issues

Apart from the allocation of resources, valuation is the key issue of transfer pricing, i.e. the valuation of intra-firms transfers. The integration of the entities contributes to the ability to exploit international differentials and utilized the economies of integration that are not made easily available to the domestic firms.

Generally, the tension that underlies between the common goals of the MNEs and overall social goals of the developing nation is perceived to be the responsibility of the MNEs. The utilization of the resources increases the profits. This however can seem to be in contrast with the social, economic and political consideration of the countries. With so many complexities forces at hand, it is evidently clear as to why the discussion of international taxation is an open-ended problem with transfer pricing at its heart.


Transfer pricing regulations are essential for the countries in order to protect the taxation base, eliminate the double taxation and to enhance the cross border trade.

Malaysian Transfer Pricing Guidelines 2012

The Malaysian Transfer Pricing Guidelines 2012 mainly governs the standard of transfer pricing which is supported by the rationale of arm’s length principle as set out under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.

Despite some of the main criteria under the Malaysian Transfer Pricing Guidelines 2012 were adopted from the OECD Transfer Pricing Guidelines, however there may be some areas that also adheres to the Income Tax Act 1967 and the Malaysian Inland Revenue Board of Malaysia procedures.

The guidelines however may be reviewed occasionally for further improvisation.

The following is an overview of the Malaysian Transfer Pricing Guidelines 2012 contents:

Part I – Preliminary

  • Introduction
  • Objective
  • Scope
  • Relevant Provisions

Part II – The Arm’s Length Principle

  • Meaning of Arm’s Length Principle
  • Determination of Arm’s Length Principle
  • Comparability Analysis
  • Factors Determining Comparability
  • Comparability Adjustments

Part III – Comparability Analysis

  • Comparable Period
  • Multiple Year Data
  • Arm’s Length Range
  • Separate and Combined Transactions
  • Re-characterization of Transactions
  • Transfer Pricing Adjustment
  • Losses

Part V – Business Restructuring

  • Business Restructuring

Part VI – Specific Transactions

  • Intragroup Services
  • Cost Contribution Arrangement
  • Intangible Properties
  • Intragroup Financing

Part VII – Documentation

  • Retention of records
  • Transfer Pricing Documentation
  • Penalty

Appendix A: Documentation on specific transactions

Appendix B : Comparability Analysis


Source: LHDN – Transfer Pricing Guidelines 2012

OECD Transfer Pricing Guidelines for Multinational Enterprises & Tax Administrations

The origin of the OECD dated to 1960’s, where 18 countries joined their forces together in creating an organisation that is dedicated to the economic development.  Presently, the members of the OECD spanning across the global have worked closely to build a stronger foundation.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations were published in July, 2010. The guidelines provides detailed guidance on transfer pricing, application of the arm’s length principle, transfer pricing methods, comparability analysis, transfer pricing documentation and more.

The OECD Guidelines are considered to be an international soft law for the OECD members. The guidelines were published to bring all of the OECD members together to achieve one collective goal. Each of the OECD member may choose to incorporate the guidelines into its national law.

The following is an overview of the OECD Guidelines table of contents:

Chapter 1: The Arm’s Length Principle

Chapter 2: Transfer Pricing Methods

Chapter 3: Comparability Analysis

Chapter 4: Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes

Chapter 5: Documentation

Chapter 6: Special Consideration for Intangible Property

Chapter 7: Special Consideration for Intra-Group Services

Chapter 8: Cost Contribution Arrangements

Chapter 9: Transfer Pricing Aspects of Business Restructurings

Seven List of Annexes

Appendix: Recommendation of the Council on the determination of transfer pricing between associated enterprises

On 14th of December 1960, approximately 20 countries originally signed the Convention on the Organisation for Economic Co-operation and Development. Since then, 15 more countries have become members of the Organisation.

The list of the current members countries of the Organisation and dates on which they deposited their instruments of ratification.




7 June 1971


29 September 1961

13 September 1961


10 April 1961


7 May 2010

Czech Republic

21 December 1995


30 May 1961


9 December 2010


28 January 1969


7 August 1961


27 September 1961


27 September 1961


7 May 1996


5 June 1961


17 August 1961


7 September 2010


29 March 1962


28 April 1964


12 December 1996


1 July 2016


7 December 1961


18 May 1994


13 November 1961

New Zealand

29 May 1973


4 July 1961


22 November 1996


4 August 1961

Slovak Republic

14 December 2000


21 July 2010


3 August 1961


28 September 1961


28 September 1961


2 August 1961

United Kingdom

2 May 1961

United States

12 April 1961

What is Transfer Pricing?

Transfer Pricing is more commonly defined as the transaction between related parties (i.e. another member of the same organisation) for the acquisition of goods, services or intangible properties. The transfer pricing allocated profits between the same members of the organisation.

From a taxation perspective, transfer pricing is extremely important and relevant. Transfer pricing could potentially lead to a distortion of profits allocated between the related parties, whereby it consequently could result companies not remitting their fair share of taxes in one or more tax jurisdiction. Thus, enjoying the tax advantage.

The arm’s length principle is a leading principle that explores and pursues to eliminate the factors that would affect the transfer price between two related parties. The concept of the arm’s length principle was defined by the Article 9 of the OECD Model Tax Convention. The Article 9(1) provides:

“[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”

The rationale of arm’s length principle is where most transactions, prices and conditions applied by the related parties should be determined by the market forces, regardless of the transactions occurred. This similar applies to the conditions of inter-company transactions as well (i.e. terms and conditions of the payments, delivery, etc.)