Of the report on the guidelines for monitoring procedures relating to the OECD guidelines on transfer pricing and business involvement [DAFFE/CFA/WD(97)11/REV1], adopted by the Committee on Taxation on 24 June 1997 and noted by the Council on 23 October 1997 [ C(97)196], recorded in the annexes;. By revising Chapters I, II, V-VIII of the report on BEPS Actions 8-10, Aligning transfer pricing results with value creation and the report on BEPS Action 13, Transfer pricing documentation and country-by-country reporting, approved by the Council on 1 October 2015 [C(2015)125/ADD8 and C(2015)125/ADD11].
Preface
Article 9, which refers to the taxation of the profits of affiliated companies and applies the market principle;. These guidelines focus on the application of the market principle to the transfer pricing of related companies.
Glossary
What is arrived at after adding cost plus mark up to the above costs can be considered an arm's length price for the original controlled transaction. A transfer pricing method that examines the profits arising from certain controlled transactions of one or more of the associated companies involved in those transactions.
The Arm's Length Principle
Introduction
All these factors can affect transfer prices and the amount of profits accruing to associated enterprises within an MNE group. Sometimes it can happen that the relationship between the associated companies can influence the outcome of the negotiation.
Statement of the arm’s length principle 1 Article 9 of the OECD Model Tax Convention 1 Article 9 of the OECD Model Tax Convention
- Maintaining the arm’s length principle as the international consensus consensus
Statement of the "arm's length" principle B.1 Article 9 of the OECD Model Tax Convention B.1 Article 9 of the OECD Model Tax Convention. The experience underlying the common principle has become sufficiently extensive and sophisticated to create a substantial body of common understanding between the business community and tax administrations.
A non-arm’s-length approach: global formulary apportionment 1 Background and description of approach 1 Background and description of approach
- Comparison with the arm's length principle
- Rejection of non-arm's-length methods
- Recognition of the accurately delineated transaction
- Losses
- The effect of government policies
- Use of customs valuations
- Location savings and other local market features
- Assembled workforce
- MNE group synergies
Tax avoidance could occur to the extent that components of the relevant formula can be manipulated, e.g. The precise delineation of the actual transaction or transactions between related enterprises requires an analysis of the economically significant characteristics of the transaction. Economic circumstances of the customers and the market in which the customers operate (D.1.4).
Company A does not have control over the economically significant risks associated with the investment in and exploitation of the asset. To be comparable, those risk assumptions require that the economically relevant characteristics of the transactions are comparable. An assessment of the commercial rationality of the transaction based on Section D.2 may be necessary.
Transfer Pricing Methods
Selection of the transfer pricing method
Selection of the most appropriate transfer pricing method to the circumstances of the case circumstances of the case
As a result, where a traditional transaction method and a transaction profit method can be applied in an equally reliable manner, taking into account the criteria described in point 2.2, the traditional transaction method is preferable to the transaction profit method. Furthermore, where, taking into account the criteria described in point 2.2, the comparable uncontrolled pricing method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is preferred. As a matter of good practice, the choice of the most appropriate method and comparable documents should be documented and may form part of a typical search process as suggested in point 3.4.
However, such other methods should not be used in substitution of OECD-recognised methods where the latter is more appropriate to the facts and circumstances of the case.
Use of more than one method
Useful information, such as that which can be gleaned from unaudited transactions that are not identical to the audited transactions, should not be discarded simply because a rigid comparability standard is not fully met. Similarly, evidence from companies involved in audited transactions with affiliates can be useful in understanding the transaction under investigation or as a clue to further investigation. Furthermore, any method should be permitted where its application is acceptable to the members of the multinational group involved in the transaction(s) to which the methodology applies, and also to the tax authorities in the jurisdictions of all such members.
Traditional transaction methods
- Examples of the application of the CUP method
The difficulties encountered when attempting to make reasonably accurate adjustments should not preclude the potential application of the CUP method on a routine basis. The term “quoted price” refers to the price of the commodity in the relevant period, obtained on an international or domestic commodity exchange. Taxpayers and tax authorities should be consistent in the application of the appropriately chosen quoted price.
Where there are differences between the terms of a controlled transaction and the terms of an uncontrolled transaction, or the terms determining the quoted price for the commodity, which materially affect the price of the commodity transactions under review, reasonably accurate adjustments must be made to ensure that the economically significant features of the transactions comparable.
- Examples of the application of the resale price method
The resale price margin earned by an independent company in comparable uncontrolled transactions may also serve as a guide (“externally comparable”). Where the dealer operates a general brokerage business, the resale price margin may be related to a brokerage fee, which is usually calculated as a percentage of the selling price of the product sold. The determination of the resale price margin in such a case should take into account whether the broker is acting as an agent or agency.
If the reseller does not carry out a significant commercial activity in a controlled transaction, but only transfers the goods to a third party, the resale price margin could be small in relation to the functions performed.
- Examples of the application of the cost plus method
The extent and reliability of these adjustments will affect the relative reliability of the cost-plus analysis in particular cases. Using the cost plus method here assumes that there are no independent producers of very similar dryers). In general, the cost plus method will use markups calculated after direct and indirect costs of production, while the net profit method will use profits calculated after the company's operating expenses as well.
The basis for applying the cost plus method is formed by all costs related to the installation work.
Transactional profit methods
- Strengths and weaknesses 1
- Guidance for application
- Examples of the application of the transactional net margin method method
These factors are discussed below in relation to both the determination of net profit and its weighting. See section 2.58 for a discussion of the same issue in relation to the cost plus method. 2.105 Other net profit indicators may be appropriate depending on the facts and circumstances of the transactions.
The value of the functions performed in the controlled transaction (taking into account the assets used and the risks taken) is proportional to the operating expenses.
Transactional profit split method
- In general
- Strengths and weaknesses
- Guidance for application .1 In general .1 In general
2.119 A further advantage of the transaction profit sharing method is that it is less likely that any of the parties to the controlled transaction will remain with. 2.130 The total profit to be apportioned under the transaction profit sharing method is the profit of the associated enterprises from controlled transactions in which the associated enterprises participate. 2.123 for general guidance on the consistency of determining the total profits to be distributed.
2.140 In practice, pooled profit sharing under the transaction profit sharing method is generally achieved by using one or more allocation keys.
Conclusions on transactional profit methods
Comparability Analysis
Performing a comparability analysis
- Typical process
- Broad-based analysis of the taxpayer’s circumstances
- Review of the controlled transaction and choice of the tested party party
- Selecting or rejecting potential comparables
- Comparability adjustments
The choice of the tested party should be consistent with the functional analysis of the transaction. However, even in cases where comparable data are scarce and imperfect, the choice of the most appropriate transfer pricing method should be consistent with the functional analysis of the parties, see point 2.2. It is also easier to verify because the review concentrates on the process and on the relevance of the retained selection criteria.
A comparison may be appropriate despite an unadjusted difference, provided the difference does not have a material effect on the reliability of the comparison.
Timing issues in comparability
- Timing of origin
- Timing of collection
- Valuation highly uncertain at the outset and unpredictable events events
- Data from years following the year of the transaction
- Multiple year data
If this is the case, the tax authorities would be justified in determining the arm's length price for the transaction based on the adjustment or renegotiation clause that would be offered in a comparable uncontrolled transaction at arm's length. The behavior of the parties in the years after the transaction will also be relevant for accurately defining the actual transaction. The analysis of such information could reveal facts that could have influenced (or should have influenced) the determination of the transfer price.
However, multiple years of data and averages can be used in some circumstances to improve the reliability of the interval.
Compliance issues
For example, using data from prior years will indicate whether a taxpayer's reported loss for a transaction is part of a history of losses from similar transactions, the result of special economic conditions in a previous year that increased costs in the following year, or a reflection of the fact that a product is at the end of its life cycle. Changes in business or product life cycles may have a material effect on transfer pricing terms that must be assessed in determining comparability. For simple transactions that take place in a stable environment and whose characteristics remain the same or similar, a detailed comparability analysis (including functional) may not be necessary every year.
Although the arm's length principle applies equally to small and medium-sized enterprises and transactions, pragmatic solutions may be appropriate to make it possible to find a reasonable answer for each transfer pricing case.
Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes
Transfer pricing compliance practices
- Examination practices
- Burden of proof
- Penalties
Tax administrations are encouraged to take this observation into account in conducting their transfer pricing examinations. Second, tax examiners are encouraged to consider the taxpayer's business judgment regarding the application of the arm's length principle so that the transfer pricing analysis relates to business realities. For example, where in terms of domestic law the burden of proof is on the tax administration, the taxpayer may have no legal obligation to prove the correctness of his transfer price, unless the tax administration makes a prima facie showing that the price is unstable. with the arm's length principle.
Because of the difficulties with transfer pricing analyses, it would be appropriate for both taxpayers and tax administrations to exercise particular caution and use restraint in relying on the burden of proof when considering a transfer case. the price.
Corresponding adjustments and the mutual agreement procedure: Articles 9 and 25 of the OECD Model Tax procedure: Articles 9 and 25 of the OECD Model Tax
- The mutual agreement procedure
- Corresponding adjustments: Paragraph 2 of Article 9
- Concerns with the procedures
- Guidance, approaches and actions taken to address concerns with the mutual agreement procedure with the mutual agreement procedure
- Secondary adjustments
Appropriate adjustments and mutual agreement procedure: Articles 9 and 25 of the OECD Model Tax Procedure: Articles 9 and 25 of the OECD Model Tax. This confirms that the mutual agreement procedure set out in Article 25 may be used to deal with relevant adjustment claims. There may not be any procedures for suspending the collection of tax deficiencies or charging interest pending the resolution of the mutual agreement case.
This problem arises not only in connection with the mutual agreement procedure, but also in connection with internal complaints.
