There is an overwhelming amount of guidelines available to help you explore the wonderful world of transfer pricing. This article summarizes the most important transfer pricing guidelines. Summaries and links are provided. This is part of our series on defining transfer pricing.
OECD Transfer Pricing Guidelines
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the Guidelines) can be considered as the “holy book” for transfer pricing. The first draft version of the OECD Guidelines was published on 27 June 1995, which was a revision of the OECD Report on Transfer Pricing and Multinational Enterprises published in 1979. Since the first draft version, the OECD Guidelines have been developed and updated regularly. The most recent version is from 2017.
The OECD Guidelines provide guidance on the application of the “arm’s length principle” and have two objectives. First, for governments to ensure that the taxable profits of Multinational Enterprises (MNEs) are not artificially shifted out of their jurisdiction; and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. Second, for taxpayers to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s length remuneration for their cross-border transactions with associated enterprises.
Is OECD Guidance Law?
A common question is if the OECD Guidelines are legally binding for MNEs. Well, the answer is “yes and no”. The OECD, like most international organizations, generally only creates rules that are qualified as “soft laws.” Soft laws are rules that do not have any legally binding force, or whose binding force is weaker than the binding force of traditional laws. The latter are often referred to as “hard laws.” For the OECD Guidelines (and other OECD transfer pricing guidance) to have effect, OECD Member States must implement them in domestic laws or tax treaties first so they may become “hard laws.”
Most OECD Member States, and an increasing number of non-OECD Member States, have done this. The benefit of this is that the framework of transfer pricing rules is equally applicable in numerous countries around the world. However, there are differences in the implementation and enforcement of these rules. Consequently, it is essential that you always comply with domestic transfer pricing rules.
The OECD Guidelines span a respectable 612 pages in total. It is divided into 9 chapters, a list of annexes, and an appendix. But don’t worry, we have done the reading for you. In the overview below you see for each chapter when you need to read it.
Summary of chapters:
Content | Title | Importance | When to read |
Chapter I | The Arm’s Length Principle | High | If you want to understand the nature of the arm’s length principle and seek guidance for the application thereof. |
Chapter II | Transfer Pricing Methods | High | If you want to understand, select and apply the five common transfer pricing methods. |
Chapter III | Comparability Analysis | High | If you are performing and drafting a comparability analysis, which is a crucial part of the transfer pricing analysis. |
Chapter IV | Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes | High | If you are trying to avoid or resolve a transfer pricing dispute. (Best do this before you’re in the middle of a dispute!) |
Chapter V | Documentation | High | If you are preparing, reviewing or updating transfer pricing documentation. |
Chapter VI | Special Considerations for Intangible Property | Medium | If you are analyzing controlled transactions involving Intangible Property. |
Chapter VII | Special Considerations for Intra-Group Services | Medium | If you are analyzing controlled transactions involving services. |
Chapter VIII | Cost Contribution Arrangements | Medium | If you are analyzing controlled transactions involving cost contribution or cost sharing arrangements |
Chapter IX | Transfer Pricing Aspects of Business Restructuring | Medium | If you are analyzing the transfer pricing aspects of business restructurings. |
List of Annexes | List of Annexes | Medium | If you are looking for specific guidance not including in the other chapters. Examples are Local File, Master File guidance. |
Appendix | Council Recommendation on the Determination of Transfer Pricing between Associated Enterprises | Low | If you can’t sleep 😉 |
UN Transfer Pricing Manual for Developing Countries
The OECD is an organization of developed countries. One of the complaints about their Guidelines is that these do not appropriately address and consider the position of developing countries. At the 2010 annual meeting of the UN Committee of Experts on International Cooperation in Tax Matters, it was decided to provide transfer pricing guidance to policy makers and administrators in developing countries. Eventually this initiative resulted in the publication of the UN Transfer Pricing Manual for Developing Countries (the Manual) in 2013. A second version of the Manual was published in 2017, while a third version is under preparation.
The transfer pricing guidance of the UN Manual is to a large extend in line with the Guidelines. However, there is much more focus on transfer pricing issues that are typical for developing countries. An example is how to properly address the relatively lower cost base in developing countries in transfer pricing arrangements. Especially when dealing with such developing countries, which include China and India, the UN Manual is of great value to understand the transfer pricing positions you may encounter in those countries. The UN Manual can be downloaded here.
The Manual spans 499 pages in total. It is divided into 10 chapters, 2 annexes, and a glossary. In the overview below you see for each chapter when you need it:
Summary of chapters:
Content | Title | Importance | When to read |
Chapter I | Introduction to transfer pricing | High | If you want to understand the concept of transfer pricing and the practical application. |
Chapter II | Business framework | Low | If you want to understand more about MNEs and how they operate. |
Chapter III | General legal environment | Medium | If you want to understand the legal environment related to transfer pricing. |
Chapter IV | Establishing transfer pricing capability in developing countries | Low | If you want to understand how to set-up a transfer pricing unit in a tax authority |
Chapter V | Comparability analysis | High | If you are performing and drafting a comparability analysis, which is a crucial part of the transfer pricing analysis. |
Chapter VI | Transfer pricing methods | High | If you want to understand, select and apply the five common transfer pricing methods. |
Chapter VII | Documentation | High | If you are preparing, reviewing or updating transfer pricing documentation. |
Chapter VIII | Audits and risk assessment | Medium | If you want to learn more about transfer pricing audits and risk assessments. |
Chapter IX | Dispute and avoidance and resolution | Medium | If you are trying to avoid or resolve a transfer pricing dispute. (Best do this before you’re in the middle of a dispute!) |
Chapter X | Country chapters | Low | If you want to under the view of China, India, Brazil and South Africa on transfer pricing issues. |
Appendix I | N/a | Low | If you want to see examples of the application of Chapter V. |
Appendix II | N/a | Low | If you want to see example of disclosure forms and country rules on documentation |
Glossary | N/a | Low | If you want to know the meaning of specific terms. |
Other relevant guidance
The following transfer pricing resources may also be relevant to you:
The Big Four frequently publish easy accessible transfer pricing guidance. For example, EY has a worldwide transfer pricing reference guide, which summarizes transfer pricing rules around the world. The publish both a downloadable guidebook in PDF, as an easy to navigate website.
The EU Joint Transfer Pricing Forum, which advises the European Commission on transfer pricing matters, also regularly publishes transfer pricing guidance.
Thank you for reading this article. And if you wish to understand more about transfer pricing, take a look at our transfer pricing course!
