Transfer Pricing: International Practice and Guidelines
Transfer pricing is a mechanism for determining arm’s length pricing in related-party transactions, often in the context of cross-border related-party transactions. A key component of the Base Erosion and Profit Shifting (BEPS) initiative, transfer pricing and its alignment with value creation of the MNE group are the focus of BEPS Actions 8-10. The Organisation for Economic Co-operation and Development (OECD) serves as a source of guidance and maintains own guidelines related to transfer pricing. Combined with individual jurisdictions’ own interpretations and applications of guidelines from the OECD, these sources aim to prevent profit shifting to lower tax jurisdictions and avoid international double taxation.
What are some of the key topics in transfer pricing?
For an understanding of transfer pricing and how it can impact them specific to their jurisdictions, taxpayers should generally be aware of the following topics:
- Overview of the Jurisdiction’s Tax System
- Evolution of the Jurisdiction’s Transfer Pricing Rules
- Specific Transfer Pricing Rules
- Documentation and Reporting Requirements
- Transfer Pricing Audits
- Transfer Pricing Adjustments
- Transfer Pricing Penalties
- Appeals and Litigation Matters
- Competent Authority
- Advance Pricing Agreements and Rulings
The Arm’s Length Principle: The Standard in Transfer Pricing
The arm’s length principle is the international standard on which OECD member countries have agreed to be used for determining transfer prices. The transfer pricing regulations and rules try to determine the price that the related parties would have agreed to if they had dealt with each other at arm’s length as unrelated parties.
According to Article 9 of the OECD Model Tax Convention, the arm’s length principle is defined as follows: where ‘conditions are made or imposed between the two 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 OECD has stated that the arm’s length principle provides broad parity of tax treatment for members of MNE groups and independent enterprises because it puts associated and independent enterprises on a more equal footing for tax purposes by treating the members of an MNE group as operating as separate entities rather than as inseparable parts of a single unified business. Attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from the conditions that would be obtained in comparable uncontrolled transactions. Such an analysis of the controlled and uncontrolled transactions, which is referred to as a ‘comparability analysis’, is at the heart of the application of the arm’s length principle.
The BEPS Minimum Standard of Three-Tier Documentation
Recent developments in transfer pricing have highlighted the relevance of robust documentation to support MNEs’ current transfer pricing and any relevant changes in their business practices or business models. Three-tier documentation, which includes the master file, local file and CbC Report, are a hallmark of the BEPS framework for transfer pricing.
According to the OECD, the master file contains standardised information that is relevant to all members of the MNE group. The local file includes material transactions specific to the local taxpayer. Finally, the Country-by-Country Report (or CbC Report) contains information on the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group.
A number of practical tools are available on Bloomberg Tax & Accounting to help taxpayers stay informed about specific requirements and maintain proper documentation.
Available for Our Subscribers:
Download: Transfer Pricing Forum
This collection of unique perspectives from practitioners in various jurisdictions identifies the latest transfer pricing developments from around the globe and the impacts on current transfer pricing practice.
What guidelines does the OECD offer regarding transfer pricing?
The Organisation for Economic Co-operation and Development (OECD) first published its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995. Reflecting an ongoing focus on international tax challenges including transfer pricing issues. The OECD has since continuously revised and supplemented the guidelines.
The guidelines include a preface, a glossary and 10 topical chapters, which have been supplemented with a number of annexes. The most recent edition of the guidelines, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, was published in January 2022, following a substantial revision and expansion as part of the Base Erosion and Profit Shifting (BEPS) initiative. This latest version consolidates changes since the 2017 edition of the guidelines, including guidance on the Transactional Profit Split Method, hard-to-value intangibles, and financial transactions.
The OECD employs the arm’s length principle because it ‘provides broad parity of tax treatment for members of [multinational enterprise] groups and independent enterprises’, avoiding the creation of ‘tax advantages or disadvantages that would otherwise distort the relative competitive positions of either type of entity’. The guidelines state that the arm’s length principle ‘has also been found to work effectively in the vast majority of cases’.
Aside from updating its official transfer pricing guidelines, the OECD continues to carry out significant work related to transfer pricing issues, including recent guidance on the transfer pricing implications of the COVID-19 pandemic.
Subscribers Only: Portfolio 6936-2nd: Transfer Pricing – OECD Transfer Pricing Guidelines
This portfolio describes and interprets the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as in effect on June 21, 2018.
How can taxpayers stay informed about transfer pricing developments?
To keep up with the fast pace of new developments in transfer pricing across various jurisdictions, taxpayers need as many tools and resources as possible. Whether they are tracking developments regarding financial transactions, hard-to-value intangibles, the mutual agreement procedure (MAP) or advance pricing agreements (APAs), our tracking tools and guides help taxpayers stay informed of the latest developments in over 100 jurisdictions. In addition, our products provide the latest information on the BEPS Multilateral Instrument (MLI) and its impact on treaties and dispute resolution, often resulting in consequences for transfer pricing.
Available for Our Subscribers:
Download: Digital Revolution – Transfer Pricing on the Global Tax Battlefield
This special report contains case studies and an overview of digital technology trends that interact with key tax issues companies must actively navigate.
Key IRC Sections
Bloomberg Tax Research is pleased to offer the full text of the current Internal Revenue Code free of charge. This site is updated continuously and includes Editor’s Notes written by expert staff at Bloomberg Tax indicating when a section has been repealed or when there is a delayed effective date, allowing you to see the current and future law. Links to related code sections make it easy to navigate within the IRC.
From in-depth research and analysis to timesaving practice aids, Bloomberg Tax Research has the resources you need to provide informed advice.
Access to this information requires a subscription to Bloomberg Tax Research. Don’t have access? Request a demo.
Transfer Pricing Portfolios
Bloomberg Tax’s Transfer Pricing Portfolio Series features more than 20 portfolios about transfer pricing rules and regulations.
Transfer Pricing Methods Flowchart
Refer to this flowchart, part of our transfer pricing working papers, to identify the best method under § 482 regulations.
Country Guide: Transfer Pricing Policies
This chart provides a simple and clear overview of transfer pricing rules and developments country by country.