TRANSFER PRICING

Abstract

For a number of years, the Organization for Economic Co-operation and Development (OECD) has had guidelines on transfer pricing. OECD follows the arm’s-length principle based the concept that contractual terms agreed to by non-arm’s length parties should be consistent with those expected to arise as if the parties had no relationship. To assess non-arm’s-length arrangements, parties related by ownership, control, and the like are notionally divided into separate entities rather than following their legal position as parts of a single enterprise. These principles apply to both multinational enterprise (MNE) and tax administrations. The OECD recognizes five acceptable pricing methods: comparable uncontrolled price (CUP); resale price method (RPM); cost plus method (CPM); profit split method (PSM); and transactional net margin method (TNMM). The choice of the method and its reliability is influenced by the data available from public sources. When comparing controlled and uncontrolled transactions, the taxpayer must be able to establish that either there are no differences or, if there are differences, how they can be quantified and adjusted.