Tag Archives: OECD

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.

Country

Date

Australia

7 June 1971

Austria

29 September 1961
Belgium

13 September 1961

Canada

10 April 1961

Chile

7 May 2010

Czech Republic

21 December 1995

Denmark

30 May 1961

Estonia

9 December 2010

Finland

28 January 1969

France

7 August 1961

Germany

27 September 1961

Greece

27 September 1961

Hungary

7 May 1996

Iceland

5 June 1961

Ireland

17 August 1961

Israel

7 September 2010

Italy

29 March 1962

Japan

28 April 1964

Korea

12 December 1996

Latvia

1 July 2016

Luxembourg

7 December 1961

Mexico

18 May 1994

Netherlands

13 November 1961

New Zealand

29 May 1973

Norway

4 July 1961

Poland

22 November 1996

Portugal

4 August 1961

Slovak Republic

14 December 2000

Slovenia

21 July 2010

Spain

3 August 1961

Sweden

28 September 1961

Switzerland

28 September 1961

Turkey

2 August 1961

United Kingdom

2 May 1961

United States

12 April 1961

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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.)