OECD published its updated Transfer Pricing Guidelines on Multinational Enterprises and Tax Administrators
On 20 January 2022, the Organisation for Economic Cooperation and Development (OECD) released its updated edition of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The 2022 Edition is largely a consolidation into one publication of a number of separate guidelines produced over recent years and does not contain anything substantially new. However, it is an opportune moment to remind ourselves as to the overall content and purpose of the publication.
The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which is the international consensus on the valuation of cross-border transactions between associated enterprises. The 2022 edition includes the revised guidance on the application of the transactional profit method and the guidance for tax administrations on the application of the approach to hard-to-value intangibles agreed in 2018, as well as the new transfer pricing guidance on financial transactions approved in 2020. Finally, consistency changes have been made to the rest of the OECD Transfer Pricing Guidelines.
In a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in any country reflects the economic activity undertaken in that country. Key to ensuring this are the methods set out in the OECD Guidelines for establishing arm’s length transfer prices.
Transfer prices are the prices at which an enterprise transfers physical goods, intangible property or provides services to associated enterprises, and which should be in line with the arm’s length principle. Transfer pricing principles apply also to the transfer of costs (ie cash pooling, recharging of costs for centralised functions to other entities of the MNE). Transfer prices are significant for taxpayers and tax administrations as they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions. Therefore, MNEs must be able to provide transfer pricing documentation at the request of tax authorities in order to avoid or limit the risk of reassessments and litigation.
The Guidelines focus on the application of the arm’s length principle to evaluate the transfer pricing of associated enterprises. The Guidelines analyse the methods for evaluating whether the conditions of commercial and financial relations within an MNE satisfy the arm’s length principle and discuss the practical application of those methods.
OCED member countries are encouraged to follow these Guidelines in their domestic transfer pricing rules and thereby taxpayers are required to follow these Guidelines in evaluating for tax purposes whether their transfer pricing complies with the arm’s length principle. The Guidelines are intended to govern the resolution of transfer pricing cases in mutual agreement proceedings between OECD member countries and, where appropriate, arbitration proceedings.
OECD Transfer Pricing Guidelines can be found here.