In this article we will discuss about:- 1. Meaning of Transfer Pricing 2. Transactions Involving Transfer Pricing Issues 3. OECD 4. Guidelines 5. Domestic Tax Law 6. Tax Treaties 7. Various Countries.


  1. Meaning of Transfer Pricing
  2. Transactions Involving Transfer Pricing Issues
  3. OECD and Transfer Pricing
  4. Guidelines on Transfer Pricing
  5. Transfer Pricing under Domestic Tax Law
  6. Transfer Pricing under Tax Treaties
  7. Transfer Pricing in Various Countries

1. Meaning of Transfer Pricing:

Transfer pricing is an economic term, which refers to the valuation process for transactions between related entities. It is defined as “the amount charged by one segment of an organization for a product or service that it supplies to another segment of the same organization”.


Improper transfer pricing methods lead to unjustified profit transfers between countries. For example, artificially deflated or inflated prices on transactions would reduce or increase the taxable profits of associated companies in other countries. Such practices are considered as unacceptable tax avoidance.

Multinational enterprises (MNEs) have the flexibility to place their enterprises and business activities anywhere in the world. With increasing globalization, a significant volume of the world trade consists of international transfers of goods and services, capital and intangibles by MNEs themselves.

They account for over 60% of the global trading transactions today. Most cross-border trade does not take place between unrelated buyers and sellers, but within related entities of MNEs located in comparably taxed jurisdictions.Whereas the MNEs need to source various inputs, and then manufacture and/or market globally to be competitive, taxes are still imposed and payable on a national basis.

The real issue affecting transfer pricing today relates to the sharing of the taxable income by the countries, in which MNEs operate lawfully. They arise from normal business practices that do not necessarily involve artificial transactions or tax avoidance.


There may be no significant impact on the financial results or taxation of the multinational enterprise as a whole, and the global corporate tax liability may not be reduced or avoided.

However, the tax payable in each tax jurisdiction is affected. In such cases, the taxpayer’s intentions or motive alone to minimize, or not to minimize, its global tax burden may become irrelevant.

Transfer pricing deals with sharing of global tax revenues by countries on cross-border transactions. Each country wants to attract MNEs to their country, but it also wants to ensure that its legitimate rights over the tax receipts due from their activities in its tax jurisdiction are protected.

Therefore, national tax authorities may question the transfer pricing on international transactions, if they lead to an unacceptable loss of tax revenue that they believe is due to them and not to another country.


Paragraph 3 of the Preface of the 1979 OECD Report on Transfer Pricing and Multinational Enterprises mentions that the term “transfer pricing” is neutral: “the consideration of transfer pricing problems should not be confused with the consideration of problems of tax fraud or tax avoidance, even though transfer pricing policies may be used for such purposes”.

Tax administrations should not automatically assume that associated enterprises manipulate their profits. Moreover, arm’s-length adjustments must be applied, irrespective of any contractual obligation of the parties and of any intention of the parties to avoid tax.

2. Transactions Involving Transfer Pricing Issues:

Transfer pricing issues affect situations when goods and services are provided, knowingly or otherwise, on a non-arm’s length basis by related entities. These situations arise in a wide range of cross-border transactions.


For example:

(a) Transfers of Tangible Property:

i. Sale and purchase of inventory and other physical assets.

ii. Transfer of machinery and equipment.


iii. Rental of property and leasing arrangements.

iv. Re-invoicing or “turnaround” companies.

(b) Transfers of intangible property rights through outright sale or gift, a licence under royalty or a royalty-free licence, or through a cost contribution or cost sharing arrangement:

i. Manufacturing or trade intangibles, e.g. copyrights, patents and unpatented technical know-how, trade secrets, and other technology transfers.


ii. Marketing intangibles, e.g. trained sales-force, marketing and sales knowledge and skills, market research, trade names and trademarks, brand equity, corporate reputation, promotional material, advertising, distribution network, quality control, after sales service, customer training, sales manuals.

(c) Provision of services:

i. The provision of technical services and assistance with or without the transfer of an intangible property right.

ii. Management assistance and services, e.g. assignment of trained personnel, training, legal or accounting support, marketing assistance, systems, training.


iii. Centralized management, distribution and other inter-group co-ordination arrangements.

iv. Sharing of overhead costs at headquarters, training costs, etc.

v. Research and development services where this activity does not involve a transfer of intangible property rights, e.g. subcontracted research and development activities.

(d) Provision of finance:

i. Interest rate, amount, guarantees or collaterals on related party debt.

ii. Short-term working capital finance through inter-company transactions, advances of capital or parent guaranteed bank loans.


iii. Market penetration or maintenance payments through lump-sum payments or a reduction in transfer price.

iv. Credit terms and financing arrangements including deferred payment arrangements or factoring of inter-company debts.

3. OECD and Transfer Pricing:

As transfer pricing in international taxation deals with cross-border transactions, it requires international acceptance of both the issues and their solutions.

Over the past several decades, the Organization of Economic Co-operation and Development (“OECD”) has studied the international tax implications involving transfer pricing and evolved a common approach. Their Reports provide a framework within which the tax authorities and taxpayers can judge, and manage, the transfer pricing issues on cross-border transactions.

The various reports of the OECD Committee on Fiscal Affairs on transfer pricing, include:

a. Transfer Pricing and Multinational Enterprises (“1979 Report”)

b. Transfer Pricing and Multinational Enterprises: Three Taxation Issues (1984)

c. Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995) – hereafter called “Guidelines”.

The 1979 OECD Report defined the principle as “the price which would have been agreed upon between unrelated parties engaged in the same or similar transactions under the same or similar conditions in the open market”.

Therefore, the arm’s-length price on transactions between group entities should be derived from prices that would have been applied by unrelated parties in similar transactions under similar conditions in an open market.

This definition contains six basic features:

(i) Transactional analysis:

The arm’s-length price must be established with respect to a single identified transaction.

(ii) Comparison (or similarity):

The identified transaction must be compared with another transaction (hypothetical or actual) with similar characteristics.

(iii) Private law contractual arrangement:

The arm’s-length price must take into account any legal obligations entered by the contracting parties.

(iv) Open market feature:

Any arm’s-length price must be based on market conditions and reflect ordinary business practices.

(v) Subjective features:

The arm’s-length price must consider the particular circumstances that characterize the transaction.

(vi) Functional analysis:

The arm’s-length price must consider the functions performed, assets used and risks assumed by the related entities.

The Guidelines replace the 1979 Report and again recommend that both the tax authorities and the taxpayers apply the arm’s-length principle. They mention that the OECD MC Article 9 is the “authoritative statement of the arm’s length principle.”

Article 9(1) MC states that 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”.

4. Guidelines on Transfer Pricing:

The 1995 Guidelines also provide guidance on several special transfers pricing issues, including:

Administrative Approaches:

Administrative approaches to minimise and resolve cross-border transfer pricing disputes. It requires that the tax authorities understand the problems of the taxpayer. Transfer pricing is not an exact science and an unrealistic precision should not be expected. They should take the commercial judgement of the taxpayer and business realities as a basis.

The burden of proof under domestic tax law varies widely. In some countries, the burden of proof lies on the tax authorities in assessments, appeals and tax litigations while in other countries the onus is on the taxpayer. In some other countries, the burden of proof is on the taxpayer if he does not produce appropriate documentation or if he filed a false return, etc.

These differences may cause problems which are hard to resolve through the Mutual Agreement Procedure (“MAP”) under tax treaties. The starting point of the Guidelines in a MAP is that the State that has made the primary adjustment bears the burden of proof that the adjustment is justified both in principle and as regards the amount.


The Guidelines explicitly state that there is no obligation to present supporting documents at the time the transfer price is determined or the tax return is filed. Information requirements that should be provided when filing a return should be limited to information which enables the tax administration to select cases for further examination.

The Guidelines also state that it is not reasonable to burden the taxpayer with disproportionately high costs (for example, to obtain documents from foreign related enterprises) or in an exhaustive search for comparables, if the taxpayer believes that no comparables exist or if obtaining comparables would incur disproportionate costs for the taxpayer.

The taxpayer should not be expected to provide more documentation than the minimum required for a reasonable determination by the tax administration that the taxpayer has complied with the arm’s-length principle.

The Guidelines recommend the use of contemporaneous documentation.The OECD’s Discussion Draft on comparability released in May 2006 defines the term “contemporaneous” as during the same period of time, and not necessarily during the same tax year.

The Discussion Draft also mentions:

“For instance, depending on the industry concerned and the circumstances of the case, a transaction that took place in November 2001 might be more comparable to a transaction in the same industry that took place in January 2002 than to one that took place in January 2001”.

Therefore, the requirement of contemporaneous data may be met more in some cases by considering the transactional data in another tax year rather than the same tax year. For the data to be contemporaneous it must broadly relate to the same period of time rather than to the same fiscal or calendar year.


Guidelines deals with commercial intangibles dividing them into “trade intangibles” (also called manufacturing intangibles) that relate to the production of goods and the provision of services and are usually developed through research and development, and “marketing intangibles”, which refer to their commercial exploitation.

Unlike the US Regulations, the Guidelines do not favour the “commensurate with income” concept for super royalties since it is based on hindsight.

It appears comparatively easy to compute the arm’s-length price for most tangible goods and services, provided comparable price data is available. Intangibles present more difficulties. The arm’s-length principle may be difficult to apply to controlled transactions involving intangibles due to lack of comparables.

Moreover, a controlled transfer may be structured in a manner that independent enterprises would not contemplate. The Guidelines suggest that both the transferor and the transferee perspectives should be considered for comparability.

While the transferor is concerned with the price of comparable uncontrolled transactions, the transferee also reviews the value and utility. The point of comparison for the transferor is the price at which a comparable independent enterprise would be willing to transfer the 1 intellectual property rights.

The transferee will evaluate whether the expected benefit is satisfactory in relation to the price. Under the arm’s-length principle, it has to be determined whether an independent enterprise would be prepared to pay the price, considering the expected benefits and expenditure to be incurred.

Transfers of intangible property can be made either as:

(a) Sale of the intangible;

(b) A licence agreement under which a royalty is paid;

(c) Compensation included in the price of goods e.g. selling unfinished products including experience for further processing of the products; or

(d) A package covering remuneration for all kinds of intangibles and related technical assistance and training.

The parts of the package may need to be considered separately to verify the arm’s-length character of the transfer. Know-how contracts and service agreements may be treated differently for tax purposes.

The Guidelines list several factors which should be taken into account. In the case of a sale or licence of intangible property, the CUP method may be used if the same owner has transferred comparable intangibles under comparable circumstances to independent parties.

If such information is available, the amount of consideration charged in comparable transactions between independent enterprises in the same industry may be taken as a guide. The resale price method may be used in the case of sub-licensing by the associated enterprise to third parties.

In cases involving highly valuable intangibles, comparables may not be found.In such cases, where both parties own valuable intangibles or unique assets the profit-split method may be used.

Intra-group Services:

Guidelines discusses transfer pricing issues involving intra-group services, namely services provided by one member of a MNE to other members and the arm’s-length consideration for such services.

For an intra-group service to be recognized, the Guidelines specify that it must resemble a service for which an independent enterprise in comparable circumstances would be willing to pay or to perform in-house for itself.

If not, the activity should not be considered as an intra-group service under the arm’s-length principle. If specific group members do not need the activity and would not be willing to pay for it if they were independent, the activity would not justify a payment.

Furthermore, no payment is due to a parent company for its shareholder or “stewardship expenses” or for raising funds for acquisitions or investments. Any incidental benefit solely as a member of the group without any specific services should be ignored.

Intra-group services may be charged either directly or indirectly. Under the direct charge method, associated enterprises are charged for specific services rendered to them. If a MNE also provides such services to independent enterprises (which normally would involve records of the work done and costs incurred), it must be able to use the direct method also for similar intra-group services.

The CUP method is likely to be used where comparable services are provided in the open market either between external parties or between the associated enterprise and an independent party. In the absence of a CUP, the cost plus method is probably appropriate. In exceptional cases, more than one method may be used to reach a satisfactory arm’s-length price.

If a direct charge method is difficult to apply, a multinational enterprise may apply indirect methods such as cost sharing, or incorporate a service charge, or do not charge at all.

Indirect charge methods are allowed provided that:

(a) The charges are supported by identifiable and reasonably foreseeable benefits;

(b) The method is capable of producing charges or allocation of costs that are commensurate with the actual or reasonably expected benefits to the recipient;

(c) The allocation makes sense from a commercial point of view;

(d) The method contains safeguards against manipulation; and

(e) It follows sound accounting principles.

Indirect charge methods are necessary where the proportion of the value of the services rendered to the various relevant entities cannot be quantified except on an approximate or estimated basis, e.g. in the case of promotion activities carried out centrally, which may affect the production and sales of a number of affiliates.

Indirect charge methods are also acceptable in cases where a separate recording and analysis of the relevant service activities for each beneficiary would involve a disproportionate administrative burden in relation to the activities concerned.

An independent enterprise would normally seek to charge for services in such a way as to generate a profit, rather than providing the services merely at costs. When the associated enterprise only acts as an agent or intermediary in the provision of services, the mark-up should relate to the costs of the agency function itself rather than to the cost of the service.

For example, an associated enterprise which rents advertisement space on behalf of group members may pass on these costs to the group members without a mark-up but apply a mark-up only to the costs incurred as an intermediary.

For practical reasons, tax administrations and MNEs may agree that all relevant costs are charged rather than trying to find arm’s-length prices for the services concerned. Tax administrations may, however, not agree to charging costs only if the provision of the service is a principal activity of the associated enterprise, where the profit element is relatively significant or where direct charging is possible.

Cost Contribution Arrangements:

Multinational entities may form cost contribution or cost sharing arrangements (CCAs) with group companies to jointly develop, produce or obtain assets, services, or rights.Each participant shares the costs and is entitled to a pro rata share of the expected benefits from the developed property without further payment.

Such arrangements may involve research and development, or services such as centralized management, advertising campaigns, etc. As the participants exploit the benefits as owners (not licensees), cost sharing does not involve the payment of licence fees.

In a CCA there is always an expected benefit but it may be uncertain, for example in the case of research. The interest of each participant should be agreed from the outset. The participants must have a reasonable expectation of the proportionate future benefits and be assigned a beneficial interest for their contribution.

Any variation of pre-existing rights on entry or withdrawal of the arrangement should lead to buy-in or buy-out payments. Therefore, balancing payments may be required to adjust the benefits among the participants.

The Guidelines state that contributions must be consistent with what an independent enterprise would have contributed under comparable circumstances given the expected benefits. Independent enterprises would require that each participant’s proportionate share of the overall contribution is consistent with his share of the benefits.

Therefore, the first step is to determine whether all the parties have the expectation of benefits; then one calculates each participant’s contribution; and finally determines whether the allocation of contributions is proper (as adjusted for any balancing payments among participants).

A CCA is a contract. It is not a transfer pricing method, but it must comply with the arm’s-length principle.

Independent parties may share risks, minimise the loss potential from an activity, or minimize costs. Therefore, the benefit of a CCA is not necessarily a profit. If all participants have paid their contributions and have received all results from the CCA for their own use, usually nothing should remain with the CCA that can be allocated.

5. Transfer Pricing under Domestic Tax Law:

In recent years, the tax authorities in several countries have adopted the OECD Guidelines for transfer pricing rules and compliance requirements. Many of them specifically refer to the Guidelines in their domestic laws or follow its recommendations.

Although countries generally limit their transfer pricing rules to cross-border related transactions only, several of them include similar domestic transactions as well (Examples: Belgium, Canada, Denmark, Greece, Poland, Portugal, Slovenia, United Kingdom, United States).

Most countries apply the transfer pricing rules only to certain related party transactions. However, some countries use a broader definition of “associated enterprises based on mutual benefit or influence (Examples:- China, India, Korea, Lithuania, and Serbia).

Few countries include transactions with tax havens and preferential tax regimes under the transfer pricing rules (Examples: Argentina, Brazil, Colombia, Kazakhstan, Latvia, and Turkey). Finally, many countries still do not have specific transfer pricing rules in their domestic tax law, and rely on their other anti-avoidance rules.

The tax authorities may make four different types of transfer pricing adjustments under their domestic law:

(i) The transaction is respected and only the price is changed;

(ii) The transaction is re-categorized for the purposes of deciding what a fair price would be;

(iii) A pricing adjustment is made in the form of a constructive dividend or regarded as a contribution to capital; or

(iv) The non-arm’s length payment may be disallowed as a deduction, or additional income may be required to be recognized under other provisions in the tax law.

Some countries have safe harbour rules, under which they grant partial or total relief from transfer pricing obligations. For example, the agreed minimum percentage mark­ups based on industry norms may be used in specific transactions (Examples; Brazil, Kazakhstan, Russia).

The Guidelines discourage them since they do not reflect the arm’s length standard. Their use can also create conflicts with the Revenue authorities in countries where the approach is unacceptable.

As transfer pricing adjustments affect the taxation in more than one country, double taxation could arise if the tax authorities adopt conflicting tax treatment of an affected transaction. It is necessary for the tax authorities in each country to harmonize their approach on transfer pricing issues.

A few developed countries have formalised bilateral procedures to deal with factual issues involving more than one tax authority (Examples: Australia, Canada, France, Japan, Netherlands, and United States). Some countries allow simultaneous tax examinations by both countries in transfer pricing cases.

Several countries have established procedures to grant unilateral, bilateral or multilateral rulings on transfer pricing issues under an “advance pricing arrangement” (“APA”s).

These arrangements, where bilateral or multilateral, can provide the taxpayer with certainty on taxation of certain cross-border transactions among related parties. APAs differ from private rulings in that APAs deal with factual issues, whereas rulings are concerned with explaining the law based on facts presented by the taxpayer.

In the case of rulings, the facts may not be questioned by the tax administration, whereas under an APA the facts are subject to investigation. APAs usually cover several or all of a taxpayer’s transactions for a given period of time, whereas a ruling covers only one particular transaction.

Countries that have adopted the Guidelines usually enforce the rules through the requirement that the taxpayers maintain contemporaneous documentation to support the compliance with them under their domestic tax law.

They must be adequate, as well as timely, for tax audits. Non-compliance with the documentation rules, which may be subject to external professional review (e.g. accountants’ report), are subject to heavy penalties.

As the requirements vary, they add significant additional compliance overhead for the multinational taxpayer. To contain such costs, some countries have agreed on a common documentation standards in recent years.

An example of uniform transfer pricing documentation that will meet the requirements of its member countries is the documentation package introduced in 2003 by the Pacific Association of Tax Administrations (PATA). The member countries are the United States, Australia, Canada and Japan.

To avoid transfer pricing penalties, the taxpayer must:

(i) Make reasonable efforts (as specified) to establish arm’s-length transfer prices,

(ii) Maintain contemporaneous documentation and

(iii) Produce the documentation in a timely manner, when requested? The PATA agreement sets out the conditions, under which each of the three requirements are deemed to have been satisfied.

The EU Joint Forum on Transfer Pricing has also developed a Code of Conduct on Transfer Pricing Documentation (EUTPD), which was adopted by the EU Member States on June 20, 2006. The EUTPD consists of a”master file”, which is standard documentation, supplemented with country-specific documentation.

6. Transfer Pricing under Tax Treaties:

The OECD Model treaty establishes a common basis for allocating the income under an internationally accepted standard. It applies the arm’s-length principle to transactions between related or associated parties, and provides a dispute resolution procedure through the competent authorities in each Contracting State.

OECD MC Article 9 allows for profit adjustments if the actual price on transactions between associated enterprises differs from the price that would be charged by independent enterprises under normal market commercial terms (i.e. arm’s-length basis).

It also requires that an appropriate correlative or corresponding adjustment be made by the other Contracting State in such cases to avoid economic double taxation, if it is justified in principle and amount. The competent authorities of the Contracting States are required (“shall”) to consult with each other in determining the adjustment.

Other OECD MC Articles, which apply the arm’s-length principle, include the transactions between the head office and the permanent establishment (Article 7(2)). Article 7(4) permits the use of the profit-split method, provided the result is consistent with the arm’s- length principle.

The Model treaty also excludes the amount of the interest and royalties in excess of the arm’s-length amount from treaty benefits under Articles 11(6) and 12(4).

Model tax treaties use the term “associated enterprises” to cover relationships between enterprises, which are sufficiently close to allow transfer pricing rules to be applicable.

The definition covers the following situations:

(a) An enterprise A in a Contracting State participates, directly or indirectly, in the management, control or capital of an enterprise B in another Contracting State; or

(b) The same person(s) participate, either directly or indirectly, in the management, control or capital of both enterprises A and B.

An associated enterprise under the tax laws of many countries is subject to provisions and requirements not normally applicable to non-related enterprises engaged in international business. They include extensive documentation requirements, reversal of burden of proof, penalties, etc.

Neither the OECD Commentary to Article 9 nor the Guidelines provide guidance on the definition of the term “associated enterprise” and in particular “participate(s) directly or indirectly in the management, control or capital”.

The span of the word “control” often causes problems, as in open market situations a degree of control among business partners may exist. An additional problem is that domestic definitions vary widely.

Thus, the definition under the Model treaty is unclear. While management and capital appear fairly straightforward, the concept of control is often extended under the domestic law in many countries.

For example, several South American countries do not require controlled relationship and include all transactions with tax havens under the transfer pricing rules (Examples: Argentina, Brazil, Colombia). France includes both contractual and factual relationships.

Germany provides for controlling influence while Italy takes a de facto control position. In Japan, associated enterprises include special relationship. The United States defines it as ability to cause parties to make arrangements differing from those made by unrelated parties. As mentioned earlier, some countries have adopted a wider definition under their domestic law to include mutual benefit or influence.

These broad transfer pricing provisions are based on an anti-avoidance approach under the domestic law. They give power to tax authorities to make adjustments in cases where a special relationship appears to have influenced the prices applied.

They include both de jure and de facto control, which is difficult to define. While some countries take a narrow view limiting the Article to common control others prefer a broad definition requiring compliance with the arm’s length standard.

If control is a result of a large or influential customer, typical transactions may be covered as well, unless their economic interests diverge. It is unclear whether they comply with the provisions under bilaterally negotiated treaties in many countries.

The OECD Commentary mentions that the mere inclusion of Article 9, suggests an intention to avoid economic double taxation, besides juridical double taxation, through correlative or corresponding primary adjustments.

However, the OECD MC does not make these adjustments by the other Contracting State mandatory. It suggests that the adjustment may be made by the other State only if it accepts the adjustment.

Since the exact comparables for transactions between independent parties are rare, the primary adjustment may be disputed by the other Contracting State. In cases where the tax treaties do not provide for such relief and the Revenue authorities are reluctant to grant relief, double taxation can become an issue.

Generally, the secondary adjustments result in a constructive dividend, or constructive equity or loan contribution to the recipient country. There is no provision for relief on secondary adjustments in the Model treaty. The bilateral advance pricing arrangements may provide a solution to the problems associated with these adjustments, but so far the results have been mixed.

Article 25 (Mutual Agreement Procedure) enables the settlement of disputes on corresponding adjustments by mutual agreement among competent authorities.

The OECD Commentary makes the following recommendations for the resolution of transfer- pricing disputes:

(a) Tax authorities should notify the taxpayers as soon as possible of their intention to make a transfer pricing adjustment.

(b) Competent authorities should communicate with each other in these matters in as flexible a manner as possible.

(c) The taxpayer should be given every reasonable opportunity to present the relevant facts and arguments to the competent authorities both in writing and orally.

Under the Mutual Agreement Procedure, there is a duty to negotiate but not to achieve a result or to resolve a transfer-pricing dispute under the tax treaty. As the Mutual Agreement Procedure under tax treaties is voluntary, it may not grant relief.

In the last resort, a possible solution is arbitration. The Arbitration Convention (1990) of the European Union provides for arbitration procedures on transfer pricing conflicts within the Member States. This Convention has adopted the arm’s-length principle contained in OECD MC Article 7(2) and Article 9.

There are also a few recent bilateral tax treaties that include the use of arbitration to resolve transfer-pricing disputes (Examples: France, Germany, Netherlands, and United States).

The OECD Committee on Fiscal Affairs published its Report “Improving the Resolution of Tax Treaty Disputes” in February 2007. It proposes a new paragraph 5 to Article 25 with related Commentary to provide for binding arbitration under the Model treaty.

7. Transfer Pricing in Various Countries:

(a) OECD Member Countries:


Australia follows the arm’s-length standard under the OECD Guidelines. The transaction- based methods have priority, but, if inappropriate, the profit or loss is allocated under a detailed functional analysis of the relevant entities and transactions.

In services, the general approach is whether it has conferred a benefit to an associated company. A benefit is something of economic or commercial value that an independent entity might be willing to pay for.

The Australian Taxation Office (ATO) identifies companies for transfer pricing review on a risk-based approach depending on the level of related party transactions and the reasonableness of commercial profitability.

The domestic law authorizes a special tax division (Division 13) to examine transfer pricing on cross-border transactions. The tax authorities provide advance rulings on transfer pricing issues.

Where transfer pricing adjustment leads to economic double taxation due to tax imposed in the other jurisdiction, relief is available through the Mutual Agreement Procedure. During this procedure, the ATO usually agrees to defer any action to recover the tax.


Austria follows the OECD Guidelines on transfer pricing issues. Although there is no specific legislation, transfer pricing issues on related cross-border transactions are covered by general rules on hidden profit distributions and hidden contributions, and its general anti-avoidance rule of abuse of legal forms.


Under the Belgian domestic law, three anti-avoidance measures apply to both resident and nonresident taxpayers to counter unacceptable transfer pricing.

They are:

(a) Recapture of profits,

(b) Disallowance of deductions and

(c) Disregard of asset transfer.

Profits may be added back on non-arm’s length transactions.

“Abnormal and gratuitous” advantages granted by a resident company to associated companies or persons in a tax haven may be disallowed for tax purposes, unless the taxpayer can show the bona fide nature of the transactions.

This rule does not apply if the advantages are directly or indirectly part of the taxable income of the recipient. Belgian tax treaties follow the OECD transfer pricing guidance in its tax treaties.


Canada applies its transfer pricing rules to both domestic as well as cross-border transactions. The acceptable transfer pricing methods follow the Guidelines. They include the three traditional methods but other methods may be used if appropriate to arrive at an arm’s- length transaction.

The tax authorities often challenge the management fees and inter- group service charges, and require strict activity-based cost allocation supported by contemporaneous documentation. The service charge should be reasonable, and provide a benefit that does not result in duplication of cost or effort.

Unless the supplier provides similar services to third parties, cost plus approach should be considered. The tax authorities provide rulings on advance pricing arrangements to establish an acceptable transfer method.

Czech Republic:

Under the transfer pricing rules in the Czech Republic, transactions between persons connected either through capital or otherwise are adjusted unless they are at fair market value. The term “connected through capital” is defined as a relationship where a person(s) have at least 25% direct or indirect equity or voting rights in the other person mutually or through a third person.

The term “persons connected otherwise” includes a relationship between:

(a) Persons who participate in the management or control, or

(b) Controlled and controlling persons, or

(c) Persons controlled by the same controlling person or closely related individuals, or

(d) Persons with a business relationship formed mainly for minimizing taxes.

A special provision applies for arm’s-length interest on certain related party loans. The interest amount is set at 140% of the central bank’s discount rate, unless the arm’s- length rate is lower.

In the case of nonresident PEs, the tax base cannot be lower than a same or similar activity of a resident. Advance pricing arrangements (APAs) are provided by the tax authorities on request.


Denmark follows the arm’s-length principle under the OECD Guidelines for both domestic and cross-border transactions. The principle applies to persons controlled by another person, group companies, as well as relationships between a head office and a permanent establishment. Control is based on direct or indirect ownership of at least 50% of equity or voting rights.

In December 2002, the Danish Ministry of Taxation issued detailed documentation guidance, largely based on the OECD Guidelines. Inadequate documentation leads to a fine generally equal to twice the cost saved in non-preparation of proper documentation.

In such cases, the tax authorities may also make an assessment based on available databases. If adjustments are made, 10% of the amount is levied as a penalty. The authorities also provide binding advance rulings and arrange for bilateral APAs on the basis of a tax treaty.


Related party transactions should generally follow the arm’s-length principle under the domestic law. There is no specific legislation or documentation requirement.


The French tax authorities often make arm’s-length adjustments on related party transactions under CGI Article 57. For this Article to apply, one entity must control the other, either legally through shares or de facto possibly through contractual relationships. The burden of proof is on the French authorities to demonstrate that the profits were shifted abroad.

An Article 57 adjustment may lead to disallowance of the excessive payment and additional tax payment; moreover, the difference may be treated as a constructive dividend. France permits the transactional methods as well as the TNMM and the profit split method. The tax authorities use comparisons with profits earned by similar companies, with a preference for French companies.

The new 1996 provisions on transfer pricing based on the OECD Guidelines have added specific disclosures under the domestic law when CGI Article 57 is invoked. In particular, the tax authorities can require additional information on the related party transactions from the taxpayer.

The French company must provide the details of the relationship with the foreign related companies, the pricing methods adopted for the transactions, the details of the activities of the foreign entities relating to the transactions, and their foreign tax treatment.

The approach focuses on specific transactions and does not contain automatic penalties but the tax authorities can impose a EUR 10,000 penalty when taxpayers fail to provide the required information. Higher penalties are imposed in cases of tax evasion or transfer pricing violations.

Advance pricing agreements (APA) were introduced in 1999. They provide a legal guarantee to companies that the method used to establish their transfer prices will not be challenged by the administration. The guarantee applies unless the method is not implemented in practice, information has been omitted or mistaken, or fraudulent acts are taking place.

The administration usually takes between one and a half to two years to grant an APA. A simplified procedure is available to SMEs. Informal contacts can be made with the administration prior to starting an APA procedure.

Two types of APA are available: agreements concluded with the competent authority under the treaty and unilateral agreements concluded with the taxpayer. Advance pricing agreements are also granted to foreign companies wishing to obtain the guarantee from the administration that they will not be considered as having a permanent establishment or a fixed place of business in France.

To date, more than 30 APAs have been signed by France, mainly with OECD Member States; some of them are multilateral.


Transfer pricing is governed by the domestic law (Section 1 AStG) in Germany and the practices and procedures established by the tax authorities. They follow the Administrative Principles 1983, which were largely based on the 1979 OECD Report, and are consistent with the arm’s-length principle under the current OECD Guidelines.

The Administrative Principles have been revised and partly overruled by a new Decree of the German Ministry of Finance, published on April 12, 2005. (Decree IV B4 S 1341-1/05).

The Principles require that every company must make an adequate gross profit or a return on the capital employed that is comparable with its competitors. No company should work for a profit less than what it can be expected to earn in that industry under the prevailing market conditions.

Therefore, related party transactions must be consistent with both comparable uncontrolled transactions, and the care and commercial judgment of a sound and conscientious business manager.

A taxpayer is a related person if either of the parties to the transaction, or a third party, holds directly or indirectly at least 25% equity interest or can exert a controlling influence on a taxpayer.

The Principles permit any of the three price methods under the arm’s-length standard, but the profit-based methods are not accepted. In practice, this strict view is often not applied. The Administrative Principles issued in April 2005 allow the use of transactional profit- based methods such as residual profit-split and the TNMM in certain cases.

The TNMM Method may be used for “routine services” and the residual profit-split for entrepreneurial functions. In the case of resellers or distributors, the resale price method is the preferred method.

However, depending on the allocation of risk and function a combination of methods are acceptable. Besides primary adjustments, the secondary adjustments are made to regard the income as either hidden profit distributions or capital transfers.

Under the German tax rules, the advance pricing arrangements are binding on transfer pricing issues. The authorities maintain confidential statistics about royalties and interest rates for the use of their tax auditors as comparables, and provide them with other comparable data for transfer pricing reviews.

The tax authorities do not consider foreign market comparables. Moreover, unilateral foreign APAs are not acceptable without an audit under the German tax standards.

In 2002, the German Finance Ministry released its guidelines for cross-border secondment of personnel. It follows the arm’s-length principle for allocating personnel costs on transfers to or from Germany under the comparable uncontrolled price (CUP) method. In addition, the guidelines specify extensive documentation requirements on such secondments.

The tax authorities can demand specific documentation to support international transfer prices under Section 90 of the General Tax Code. Under the 2005 Administrative Principles if the taxpayer fails to provide them, a transfer pricing violation is assumed and he” is liable to the most un-favourable tax treatment, as well as penalties varying from 5% to 10% of the additional income with a minimum penalty of EUR 5,000.

The documentation will be considered incomplete if the taxpayer uses an inappropriate transfer pricing method or uses no method or if the data are not available. It is not necessary to provide the information except during a tax audit.

These rules require contemporaneous documentation for business transactions with foreign related parties.

A domestic taxpayer is a related party if:

(i) Either, or a third person, control or hold 25% or more interest in the other;

(ii) The taxpayer or the third party can exert influence beyond the business relationship, and

(iii) Either party has an interest in increasing the other’s income.


Greece’s transfer-pricing rules follow the arm’s-length principle under the OECD Guidelines for both domestic and cross-border related party transactions.

A party is controlled for this purpose when a foreign company owns, directly or indirectly, a significant shareholding interest in the domestic company or actively participates in the administration and management of the domestic company. In the case of domestic enterprises, “control” refers to a direct or indirect administrative or economic dependence.

This principle is also applied to a nonresident company and its PE in Greece.

The law only provides for the comparable uncontrolled price method. Transfer pricing adjustments are made if the price on transactions between related parties cannot be justified as arm’s length. They are also subject to a special penalty of 10%, regardless of any fines or additional taxes on the reassessed taxable income.


Transfer pricing rules are based on the arm’s-length principle under the OECD Guidelines. The provisions also apply if the company’s equity is increased or reduced through non­cash contributions or withdrawals, or capital is distributed in kind after dissolution without a legal successor, if they are paid or received by a shareholder with majority voting control.

Advance rulings on transfer pricing (e.g. applicable transfer pricing method, decisive facts and circumstances and usual market price) are given on request for periods of three to five years, subject to renewal. The ruling is binding on the tax authorities, unless circumstances change.


There is no specific legislation. Related party transactions are covered by the general anti-avoidance provision under the tax law.


Ireland does not have any specific transfer pricing legislation for international transactions. However, tax authorities may disallow fictitious or artificial transactions under its general tax law.


Transfer pricing rules apply to cross-border transactions only. Related party transactions with nonresidents must be conducted on an arm’s-length basis.

They include transactions where:

(a) A nonresident (directly or indirectly) exercises a dominant influence,

(b) A resident enterprise (directly or directly) controls nonresident companies, and

(c) Resident and nonresident companies are under common control of a third company.

A government circular prescribes the different methods of valuation for each type of transaction. Advance tax rulings are given on transfer pricing issues.


Under the Japanese transfer pricing rule, a transaction with a related person at less than an arm’s-length price is subject to an adjustment. A related person is any foreign corporation that has a special relationship with a Japanese corporation.

Special relationship includes situations where:

(i) One or more companies own directly or indirectly 50% or more of the issued shares or capital; or

(ii) Two companies are controlled directly or indirectly by the same corporation; or

(iii) One of the two companies is able to decide the business policy of the other company.

The Japanese authorities essentially follow the transaction-based methods under the OECD Guidelines, and use secret comparables when a taxpayer does not submit necessary information to calculate the arm’s-length prices.

In a secret comparable approach, they normally apply the three transactional price methods on a case-by-case basis. As from April 2006, they also allow transactional profit methods.

The profit split method may be used to allocate the combined transactional profit. The transactional net margin method (“TNMM”) based on the relative contribution by each party is also accepted, but not the comparable profits method (“CPM”).

The domestic law provides for appeals against a transfer pricing assessment, but the appeal for a local re-examination process generally favours the tax examiners. The appeal to the National Tax Tribunal, a higher administrative body, can also be made.

A dispute can also be taken to the civil Courts. Japanese authorities grant advance rulings on transfer pricing issues under its pre-confirmation system. The mutual agreement procedure may be needed to provide corresponding adjustments.


Under the Transfer Pricing Taxation Rules, Korea applies transfer pricing rules on cross- border transactions between parties in a special relationship.

When one party owns, directly or indirectly, 50% or more of the voting shares of another party (“equity ownership test”) or when a party may affect the business decisions of another party (“substantial control test”), the two parties are deemed to have a “special relationship” for transfer pricing adjustment purposes.

Special relationships include interlocking boards of directors, significant borrowing, business dependency and reliance on the other party’s intangible property.

As from January 2003, the concept of “special relationship” has been expanded to include a situation “where a common interest is deemed to exist between two parties by virtue of capital contributions, transactions of goods or services, or the lending of funds”.

The 2006 amendments further defined related parties to include:

(a) Entities sharing common interests on capital investment, supply of goods or services or loans, and

(b) One party decides the business policy of the other or a third party decides the business policies of both parties sharing such common interest.

Transfer pricing rules also apply to transactions with unrelated third parties, if there is a prior agreement between a Korean entity and its foreign related party and the conditions of the transactions are determined by them. The term “prior agreement” includes e-mail messages or other internal communications even without formal contract or agreement.

Korea follows the permitted methods under the OECD Guidelines on cross-border transactions. In determining an arm’s-length price for transactions between parties in a special relationship, the taxpayer must choose the “best method” from either the transactional price or profit methods.

The arm’s-length price is defined as the price payable on transactions made in a normal market between unrelated parties with respect to the same or similar transaction under similar circumstances.

The tax law provides for a secondary adjustment for income allocated under the transfer pricing rules. The adjusted income is characterized either as a deemed dividend or an increase in capital investment. The secondary adjustment is waived if the allocated amount is repaid to the Korean entity within three months of the transfer pricing decision.

There are legal obligations on the taxpayer to report the transactions (including the method used and the reason for adopting it) and file documents to support the transfer price with the annual tax return.

Failure to provide information within 60 days may lead to a fine up to KRW 30 million. The tax authorities provide rulings on transfer pricing issues under the advance pricing arrangement (APA) system.

Both parties are bound by the method agreed in the APA. An applicant may withdraw his application at any time. Data provided for the APA is kept confidential and returned if the APA is refused or withdrawn.

A taxpayer may request that the authorities invoke the mutual agreement procedure with the other treaty country (a bilateral APA). Mutual agreement procedures are supplemented by regulations to allow simultaneous examination procedure with competent authorities in the other Contracting State.


There are no special transfer pricing rules. Tax authorities can re-characterize transactions if they are artificial, abnormal or solely tax-motivated under its general anti-abuse provision. Non arm’s-length transactions between a parent company and its subsidiary may be taxed as disguised dividend distributions.


The transfer pricing rules in Mexico follow the OECD Guidelines for both domestic and foreign transactions. The rules only allow the use of traditional price methods and transactional profit-based methods, such as TNMM, PSM and the residual profit split method (RPSM).

As from 2006, the CUP must be used first. Preference should be given to the resale price method and the cost plus method when CUP method cannot be used. Taxpayers must be able to prove that the method used is the most appropriate or reliable method.

The tax authorities require taxpayers with significant inter-company transactions to keep adequate contemporaneous documentation. The information should show that transactions were undertaken at arm’s length. Advance pricing arrangement rulings are provided for up to five years.


Until 2002, there were no specific rules on transfer pricing under the Dutch domestic law but the tax authorities and the Courts recognized the arm’s-length principle. The transfer price was based on comparables supported by the results of a functional analysis. Besides the transaction price methods, both TNMM and PSM were permitted as a secondary test method.

The profit-based methods were required to achieve margins that were reasonably in line with the results reported by comparable companies in the same type of industry. These margins should reflect the company’s operations as a profit centre and not as a cost centre.

In December 2001, the Dutch parliament enacted transfer-pricing legislation that codified earlier Decrees issued by the government. The new rules adopted the arm’s- length principle under the OECD Guidelines and introduced contemporaneous documentation requirements.

Under the rules, taxpayers can choose a transfer pricing method, may aggregate transactions and under certain circumstances use an arm’s-length range to determine prices. The new regime is supported by a formal advance pricing agreements (APA) process.

The rules apply to all Dutch taxpayers, including permanent establishments of nonresident taxpayers. Associated enterprises are widely defined to include entities with sufficient control to influence inter-company relationships that may lead to non-arm’s length arrangements.

In transfer pricing cases, the burden of proof is transferred to the taxpayer if the arrangements are unusual or the documentation is inadequate. The tax authorities also request comprehensive documentation to support the transfer price.

The advance pricing agreements on transfer pricing issues follow the OECD Transfer Pricing Guidelines. They may be unilateral, bilateral or multilateral. A bilateral APA is issued if the requesting company is resident in a country with a treaty that contains a mutual agreement procedure.

The specified period of the APA is usually four to five years but could be longer. The APA cannot be issued for group service companies if they have no substance in the Netherlands and their activities bear no business risks. Moreover, an APA is not granted for hybrid instruments or entities primarily used for tax avoidance purposes.

New Zealand:

New Zealand applies transfer pricing rules on cross-border transactions between associated parties under the arm’s length principle. The allowable methods are the comparable uncontrolled price method, the resale price method, the cost-plus method, the profit-split method and the comparable profits method. Binding rulings are given by the tax authorities on transfer pricing issues.


Norway generally follows the arm’s-length principle under the OECD Guidelines on related party transactions.


Poland has enacted transfer pricing rules that follow the arm’s-length principle under the OECD Guidelines. The tax law provides for the three transactional price-based methods. If they are not applicable, transactional profit methods may be used.

The rules apply to both domestic and international transactions between related parties. The parties are related if they directly or indirectly manage or control the entity or own shares in each other. Shareholder ties are deemed to exist if an entity owns at least 5% equity in the other entity.

Resident entities are also deemed as related if (a) the same person performs management, supervisory or control functions in both entities, or (b) there are family, property or employment links between them.

The tax authorities can require taxpayers to prepare and submit special tax documentation to substantiate their transfer pricing on transactions above a specified value (relatively low). The documentation is obligatory for transactions with tax havens totalling over EUR 20,000 in a tax year.

If this documentation is not provided, a penalty tax of 50% rate is levied. Taxpayers must report foreign related-party transactions if they exceed in total EUR 300,000 in a tax year. The required information must be filed within three months of the tax year-end. As from January 2006, advance pricing agreements are given.


Portugal issued transfer regulations in 2002 for both domestic and cross-border transactions between related parties (as defined). Two companies are considered as related if one of them has significant direct or indirect influence over the management of the other company.

Portugal follows the arm’s-length principle under the OECD Guidelines. Although other methods are allowed, the traditional price-based methods are given preference. The “best method rule” is applied to ensure the highest degree of comparability between transactions.

The rules provide for corresponding adjustments. Taxpayers must maintain supporting documentation for at least ten years. The documentation requirement applies only to businesses with an annual turnover over EUR 3 million. There are no provisions for advance pricing arrangements.

Slovak Republic:

The Slovak Republic follows the OECD Guidelines on transfer pricing for related party transactions with nonresidents. They apply to personally and economically related persons as well as other related persons.

Related persons comprise persons who participate in the ownership, control or administration of other persons, if such persons are under the same control or if the same person has direct or indirect equity interest in them. Participation in ownership or control exists if the direct or indirect equity or voting rights exceed 25%.

Participation in administration is a relationship between statutory or advisory bodies. Other relationships deal with situations when they are formed for minimizing taxes. Tax authorities give advance rulings on transfer pricing, binding for at least one year from the approval date.


Spain follows the OECD Guidelines and the arm’s-length principle. It allows the traditional transactional price methods and the profit split method, but not the transactional net margin method or the comparable profit method.

Transactions are subject to transfer pricing rules if they are between related parties, as defined by law. The taxpayer must make the adjustment under self-assessment in its tax return. The tax authorities must provide corresponding adjustments.

Spain provides for advance pricing arrangements. In 2007, the government announced that specific transfer pricing documentation requirements would be imposed, and they must be maintained by the taxpayers with heavy fines for non-compliance.


Profit shifting among related resident companies through inter-company pricing is generally permitted in Sweden. It generally follows the OECD Guidelines on related cross-border transactions.

The tax authorities may make adjustments if the price is not at arm’s length and if the three following conditions are met:

(a) The party to which the income is transferred is not taxable in Sweden;

(b) The parties have common economic interest; and

(c) The transaction would not have taken place except for the economic relationship.

An economic relationship is deemed to exist if the taxpayer, directly or indirectly, participates in the management or supervision of the other party, or owns part of it, either directly or indirectly.


Although it follows the OECD Guidelines, Switzerland does not have formal transfer pricing rules. Transactions between related companies must be conducted at arm’s length for both federal and cantonal tax purposes. Swiss tax authorities provide for correlative adjustment in case of a transfer pricing adjustment overseas.


In January 2007, Turkey made significant amendments to its transfer pricing rules to follow the OECD Guidelines. Under these rules, non-arm’s length transactions for the sale or purchase of goods and services are disallowed for tax purposes.

The excess profit distributed through transfer pricing is reclassified as dividend payments and taxable accordingly on the recipient. The term “purchase or sale of goods or services” is used broadly to include all economic, commercial or financial transactions and employment relations between related parties.

Related parties are defined as:

(a) Shareholders as well as corporations and individuals related to them, and

(b) Corporations and individuals, who either directly or indirectly control or are controlled by the company through management, supervision or capital.

Moreover, the spouses, siblings and ancestors and up to third level (inclusive) natural and in-law relatives of the shareholders are also included. Transactions with parties resident in certain countries or regions, which are deemed by the Council of Ministers to cause harmful tax competition, are treated as if they have been conducted with related parties.

Corporations may determine their transfer prices by applying any of the methods stated in the law. Preferred methods include the traditional transaction methods in the Guidelines, but companies can also use other methods, if it is not possible to apply them.

There is no priority among the methods; therefore the “best method” rule applies. Advance pricing agreements are given on request for a maximum period of three years. The agreement is binding on both the tax administration and the taxpayer.

United Kingdom:

The domestic law contains general and special provisions on transfer pricing issues. They deal with transactions between any two persons under common control. The term “control” refers to the ability to cause another person to act according to one’s wishes due to voting control or equity ownership or any provision under the company’s by-laws.

The provisions effectively incorporate OECD MC Article 9 and the OECD Guidelines into domestic law, and extend the arm’s-length standard to all transactions between related parties. The transactions are defined to include “arrangements, understandings and mutual practices (whether or not they are intended to be legally enforceable)”.

They also include a series of transactions (including third-party transactions) in pursuance of, or in relation to, the arrangements. There are no specific statutory rules on how the arm’s-length prices are to be determined, or on the documentation or penalties relating to transfer pricing.

The United Kingdom operates a corporate tax self-assessment. Under this system, the burden of proof lies with the taxpayer who must self-assess any need for a transfer pricing adjustment. A notional price may be substituted to adjust the amount to the price on a similar transaction between independent persons.

If non-arm’s length transactions do not result in a tax advantage, the adjustments are not permitted. HM Revenue & Customs provides bilateral APAs under the mutual agreement provision in the tax treaty.

As from April 2004, transfer pricing rules apply to both domestic and cross-border transactions. Every domestic transfer pricing adjustment is matched by a corresponding adjustment to avoid double taxation.

The transfer pricing rules do not apply to small and medium-sized enterprises in most circumstances. The separate thin capitalization rules were abolished in 2004 and are now treated as a mispricing of a debt under transfer pricing rules.

United States:

The United States applies transfer-pricing rules to both domestic and cross-border transactions between commonly controlled entities to ensure an arm’s-length result. The Internal Revenue Service issued revised transfer pricing regulations (Section 482) in 1994.

It defines control to include any kind of control, direct or indirect, whether or not legally enforceable. The regulations recommend that a “best method rule”, or the method that gives the most reliable arm’s-length result based on the facts and circumstances of the transaction under review, should be selected.

The actual methods and procedures are not relevant, provided the results reflect the arm’s-length principle. The factors to consider include the degree of comparability between controlled and uncontrolled transactions, the quality of the data and assumptions, and the number, size and accuracy of the adjustments required under each method.

The comparability test requires a functional and economic analysis, an evaluation of the inherent, specialized and business risks, a review of the contractual terms used in both controlled and uncontrolled transactions, and the study of the characteristics of the property or services.

In exact comparables may be used so long as they provide the most reliable measure of an arm’s-length result, after adjustments for material differences.

The IRS Regulations allow an additional “comparable profit method” (CPM) for transfer pricing. The method examines the entire structure for producing the profits and not just the pricing factors affecting the particular transaction. The company’s profits for a business segment are compared with similar uncontrolled companies in the industry, based on various economic performance indicators.

Approved profit level indicators (PLIs) include the operating margin, the ratio of gross profit to operating expenses (“Berry ratio”), and the return on operating assets or the return on capital employed. The IRS maintains that the CPM method does not differ significantly from the TNMM method recommended by the OECD Guidelines.

Transfer pricing rules are strictly applied on related party transactions within a multinational enterprise, with heavy penalties for any violations. The provisions require comprehensive contemporaneous documentation and disclosures to support transfer-pricing policies, as prescribed in detailed regulations.

The taxpayers are required to report the arm’s-length results in their tax returns (not financial statements) and are subjected to heavy penalties if they fail to do so. The set-offs for non-arm’s length transactions within a controlled group are only permitted between the same two parties in the same tax year.

The burden of proof rests with the taxpayer under a harsh penalty system. However, the IRS issues advance pricing rulings on acceptable transfer pricing.

The United States has also enacted “super royalty” rules for royalties in respect of the transfer of intangibles between affiliated companies under its Tax Reform Act of 1986. These intangibles refer to the rights over products or services that are produced in monopoly or near-monopoly situations.

Under this method, the acceptable royalty rate is not fixed but varies with the actual profits in future years. The United States does not accept for tax purposes that an intangible property can be sold outright for a fixed price between related parties. This method is not acceptable under the OECD Guidelines since it is considered as an improper use of hindsight.

(b) Non-OECD Countries:


Transfer pricing rules generally follow the arm’s-length rule under the OECD Guidelines. They apply to transactions with related parties, as well as to transactions with listed low-tax jurisdictions (Decree 115 of January 22, 2003), whether or not related. In the latter case, the transactions are presumed not to be made on an arm’s-length basis, unless the taxpayer can produce evidence to the contrary.

The regulations allow the use of the transactional price and profit methods, provided the most suitable or best method is used for each transaction. An inter-quartile range of +/- 5% is applied to make adjustments. The transfer pricing rules also require extensive contemporaneous documentation of transactions.

A transfer pricing return must be filed every six months followed by a detailed annual report (prepared by a certified accountant). Non-compliance with the documentation and reporting requirements are subject to specific penalties. So far, Argentina does not provide advance pricing agreements.

Special rules apply to transactions involving import and export of goods between unrelated parties. Specifically, the taxable income from exports and imports must be valued on the basis of the wholesale price in the market of origin or delivery as the benchmark.

Any excess over the benchmark price is treated as Argentina source income for the seller of the goods. To the extent the wholesale price is not available, other appropriate methods may be used. These methods may not comply with the arm’s- length principle.


Brazil introduced transfer-pricing rules in 1997. Specifically, these rules attempt to control artificial currency outflows from Brazil between related parties, or transactions with companies established in tax havens. Transfer pricing rules also apply to transactions with any jurisdiction where under the law the names of company shareholders and partners are kept confidential.

They cover imports, exports, interest payments and interest income, as well as services and rights, when they are executed between “related parties”, as technically defined by the Law. They do not apply to payments for royalty or technical, scientific and administrative assistance, which are covered separately under the tax law.

The transfer pricing rules decide the maximum and minimum transfer price of imports and exports of goods from or to related parties for tax purposes. There are four methods for calculating export transfer prices and three prescribed methods for calculating import transfer prices.

The accepted price is the average of the sale prices of similar goods or services in the Brazilian or foreign markets, transacted between independent parties. However, the lack of comparable transactions makes it difficult to use the CUP method in Brazil. Moreover, the use of the cost-plus method usually applies only to exports and not to imports.

The acceptable pricing methods for exports include the comparable uncontrolled price method, the resale price method, the cost-plus method and the wholesaler’s resale price method. They usually allow a price based on minimum gross margins of 20% for imports and 15% to 30% for export transactions under either the cost-plus or the resale-minus method.

A minimum gross resale margin of 20% applies to pure buy-sell distribution activities while a higher 60% rate is allowed for value added distribution and manufacturing activities under the resale price method.

These rules also provide for safe harbours for related party transactions outside tax havens. For example, the authorities would accept an export sale price that has a minimum of 5% profit margin (“relief of proof rule”) or exceeds 90% of the average domestic sales price on comparable goods and services (“90% safe harbour rule”).

The use of these safe harbour rules is not consistent with the arm’s-length standard under the OECD Guidelines.

Brazil transfer pricing methodologies do not follow the OECD Guidelines, and are based on a formulary approach for imports and exports. They allow the taxpayer to select the most favorable method from a tax standpoint, and not necessarily an arm’s-length price.


Chile has transfer pricing rules under the OECD Guidelines for cross-border transactions between related parties. These rules also apply to transactions between head office and PE of the same enterprise. The tax law contains additional provisions to adjust prices of imports and exports in Chile if the profit margins are unreasonable.

There is no specific documentation requirement to justify arm’s-length prices, and no need to file it with the tax authorities. The burden of proof lies with the tax authorities. Only the traditional price methods are acceptable.


China enacted its transfer-pricing rules using the arm’s-length principle under the OECD Guidelines in 1998. However, the rules contain a more comprehensive definition of related parties.

An associated enterprise is defined as an enterprise having one of the following relationships with the taxpayer: direct or indirect ownership or control in relation to capital, business operations or sale and purchase; direct or indirect ownership or control by the same third party; or other mutually beneficial affiliations.

Thus, they include, besides direct or indirect management, control or capital, any association that provides mutual benefit. Specifically, they include:

i. Ownership of at least 25% equity, either directly or indirectly or through a third party;

ii. Loan arrangements comprising at least 50% of the capital of an enterprise, or at least 10% of the loan guarantees;

iii. Right to appoint at least half of the senior managers or one managing director;

iv. Dependence on the operations of an enterprise on the intellectual property rights licensed by the other;

v. Controls over purchases and terms of purchase of production materials required by the other enterprise or similar controls over the sales of the finished products; and

vi. Effective control over production and trade through common family interests and other relationships.

The tax law provides for price adjustment under the three traditional transaction methods, namely comparable uncontrolled price, resale price and cost-plus methods. In addition, it allows any other method considered appropriate.

Special reporting and documentation requirements are specified. Transfer pricing adjustments are normally limited to the taxable income of the year that is subject to investigation and audit.

If the adjustments involve taxable income of prior taxable years, the transfer pricing rules authorize retroactive adjustments for up to ten prior years in special cases. The rules also allow corresponding adjustments to be made by related foreign enterprises under the relevant treaty provisions.

In 2004, China issued the “Implementing Rules for Advance Pricing Arrangements for Transactions among Associated Enterprises”, which set out detailed APA procedures. The arrangements are valid for two to four years following the year of application and may be renewable.

Both the tax authority and the taxpayer have an obligation to ensure that the APA information is kept confidential. If the negotiation fails, the tax authority is specifically prohibited from using any non-factual information (for example, proposals, reasoning, notions and judgements) obtained during the APA process in subsequent audits of the transactions covered by the abortive APA.


Colombia enacted transfer pricing rules in 2004, consistent with the OECD Guidelines. However, in the opinion of the Constitutional Court, the OECD Guidelines may not be directly referred to for purposes of interpretation of the Colombian transfer-pricing rules.

Where transactions are conducted with companies based in low-tax jurisdictions, the transactions are subject to transfer pricing rules unless the taxpayer demonstrates that they are not related parties. The rules do not cover local operations between related domestic companies.

Depending on size, certain companies must file a study before the tax administration every year, and must report all transactions carried out with related parties. Advanced price arrangements (APAs) may be made with the tax administration.


Croatia follows the OECD Guidelines on the arm’s-length principle for related party transactions. Generally entities are related if they have common management, control or capital. Both the transaction price and profit methods are permitted. At the beginning of each tax year, the Ministry of Finance sets the market interest rate for related party loans. Excessive interest payments are not deductible.


India introduced comprehensive transfer pricing regulations in 2001, based on the arm’s- length standard under the OECD Guidelines. These rules cover cross-border transactions between associated enterprises (including permanent establishments).

They include income and expenses, interest payments and cost-sharing arrangements. Besides the normal definition of associated enterprises, the domestic law also contains a wide range of other situations in which enterprises are deemed to be associated enterprises.

The transfer pricing rules allow the use of traditional transactional methods and profit- based methods. Any other method, if prescribed by the appropriate authority, may also be used. The Indian rules do not specify any hierarchy in the choice of method.

The taxpayer must use the “most appropriate method” based on various factors, such as the nature and class of the international transaction, the availability, coverage and reliability of data, the degree of comparability, etc. Where more than one price is determined to be the arm’s-length price, the rules provide for a “within 5% +/- range” from the arithmetic mean of such prices.

The regulations include extensive documentation requirements certified by an independent accountant annually. There are stringent penalties for non-compliance of the documentation requirement and any understatement of profits.

The rules only apply to increase the taxable income or decrease the losses and not vice versa. Currently, the law does not provide for advance pricing arrangements on transfer pricing issues.


In Indonesia, transfer pricing regulations based on the OECD Guidelines were introduced in 1993. Tax authorities grant advance pricing agreements (APA) on transfer pricing issues in related party transactions.


Transfer pricing rules follow the arm’s-length principle. Advance tax rulings are given on transfer pricing issues. Transfer pricing regulations were published in November 2006.

Ivory Coast:

The Ivory Coast has transfer pricing rules. The only acceptable method is the uncontrolled price method.


Transfer Pricing Law applies to following cross-border transactions:

i. Transactions between mutually dependent or interrelated parties;

ii. Barter transactions;

iii. Transactions involving offsetting claims;

iv. Transactions with nonresidents or persons with foreign bank accounts if the other country does not require disclosure or has a preferential tax regime or is a tax haven;

v. Transactions with legal entitles that enjoy tax exemptions or preferential tax rates; and

vi. Transactions with legal entitles that have tax losses for the two years prior to the transaction.

The last two items also apply to related domestic transactions. Other cross-border transactions are also included if the transactions price differs from the market price by more than 10%.

The government provides a list of transactions and also maintains a list of registered companies subject to the transfer pricing rules. The authorities may use cost plus or resale minus methods if the market price cannot be determined.


Transfer pricing generally follows the OECD Guidelines using the transactional price methods.

Two or more companies are connected if:

(a) They are parent and subsidiary through at least 50% equity with majority voting rights that influence decision making,

(b) Equity rights between 20% and 50% without majority voting rights, or

(c) One of the companies is resident in a listed tax haven.

The connection can also be de facto control through common direct or indirect ownership or from contractual relationships.


Transfer pricing rules follow the arm’s-length principle under the OECD Guidelines. Preference is given to the comparable uncontrolled price method, followed by the cost- plus method and the resale price method.

The profit split and transactional net margin method may be used only as a last resort. The rules define associated persons as entities and individuals, who are either related parties (e.g. shareholders or members of management or their relatives, etc.) or are able to influence each other’s commercial transactions.

Transfer pricing documentation must be kept if the taxable entity in Lithuania has:

(a) An annual turnover of at least LTL 10 million, or

(b) It is a financial and credit institution, or an insurance company.


In July 2003, Malaysia issued the guidelines on transfer pricing methodologies and documentation requirements under its general anti-avoidance rules. They are based on the OECD Transfer Pricing Guidelines. Currently, there is no provision for advance pricing arrangements.


Peru follows the arm’s-length principles under the OECD Guidelines. Regardless of the relationship, fair market value must be applied on inter-company transactions involving sales, contributions of property, property transfers and performance of services. If fair market value is not used, the tax authorities may adjust the transaction.

The fair market value is defined as the value used by the taxpayer in identical or similar transactions with unrelated parties. The law permits the tax authorities to use any of the transactional price or profit methods. Tax authorities grant advance pricing arrangements.


The Russian transfer pricing rules apply to both domestic and cross-border transactions. The Russian Tax Code allows related-party transfer prices to be reviewed for arm’s length and profit tax to be additionally charged if they are more or less than 20% of the market price for similar goods and services.

The burden of proof rests with the tax authorities. Related parties include any person or entity that has direct influence on the decisions or results of the other party. Related parties are deemed to exist if a person directly and (or) indirectly owns summarily more than 20% in the other party or is related by employment or family ties.

Generally, Russian law only allows the use of the traditional price methods, namely comparable uncontrolled price, resale price and lastly cost-plus methods under the OECD Guidelines. Profit-based methods are not allowed.

The tax authorities make the choice. The transfer pricing rules also apply to transactions between non-related parties (e.g. export/import transactions, barter transactions). Some of the methods are not consistent with the OECD Guidelines on the arm’s-length principle.

Serbia and Montenegro:

Transfer pricing rules follow the OECD Guidelines in transactions with associated entities. Associates entities are defined as entities under mutual control or major influence in business decisions, for example through ownership.

Major influence exists if there are large mutual sales contracts, technological dependence or any management control. Entities are also deemed to be associated if the same individuals are involved in their management.

The law permits the use of CUP. If direct comparables are not available, cost-plus or resale price method may be used.


Singapore issued a Transfer Pricing Guidelines Circular on February 23, 2006. The Circular endorses the arm’s-length principle under the OECD Transfer Pricing Guidelines. However, its objective is to provide guidance to assist taxpayers in resolving disputes with foreign tax authorities on transfer pricing issues. Both cross-border and domestic transactions are included. No transfer pricing legislation is currently planned.


Transfer pricing rules follow the OECD Guidelines for both cross-border and domestic transactions between related parties.

Parties are related if:

(a) One of them owns directly or indirectly at least 25% of the equity or voting rights in the other; or

(b) The same legal entity owns directly or indirectly 25% of the equity or voting rights of both companies; or

(c) The same individual or family members own directly or indirectly at least 25% of the equity or voting rights or can participate in the control and management of both companies. Taxpayers must maintain contemporaneous documentation and file a prescribed abstract with their tax return. The documentation must also be kept for ten years.

South Africa:

The tax authorities may adjust the price to reflect the arm’s-length value of transactions with a connected person under its transfer pricing rules. A definition of a connected person includes holding companies, subsidiaries, fellow subsidiaries and any other company that owns at least 20% equity share capital.

The disallowed amount is treated as a constructive dividend. South Africa follows the OECD Guidelines and regards the traditional profit methods preferable to the profit methods. South Africa does not grant advance-pricing agreements.


Taiwan introduced its Rules for Auditing Transfer Pricing of Non-arm’s-length Transactions (“TP Rules”) in December 2004. The Rules essentially follow the arm’s-length principle under the OECD Guidelines.

According to the Rules, every company that has transactions with any of its affiliates (as defined) under the TP Rules should establish a TP policy and produce documents in compliance with the TP Rules.

Thus, extensive contemporaneous documentation must be kept for tax audit purposes, if requested, and a transfer pricing report filed with the annual tax return. The Rules provide for a maximum penalty of 200% of the tax shortfall from improper transfer pricing, and include provisions for Advance Pricing Arrangements.


Under the transfer pricing rules transactions between related parties (as defined) with both residents and nonresidents must be at an arm’s-length basis. The burden of proof lies with the tax authorities and may be challenged in the Court. Any price adjustment also requires Court approval.


Venezuela’s transfer-pricing rules generally follow OECD guidelines, requiring income and expenses related to transactions between related parties to be on arm’s-length terms. The transfer-pricing rules also define related parties and set forth permitted methodologies.

The best method rule is applied to the five recommended methods. Although the per- transaction basis is preferred, the aggregate approach may be applied when transactions are “linked” or “dependent”.

Taxpayers are required to keep detailed and contemporaneous documentation, and to verify the existence of arm’s-length pricing by conducting a transfer-pricing study. Prices that do not reflect an arm’s-length amount may be adjusted by the tax authorities. Unilateral and bilateral advance pricing arrangements are provided.


Most other non-OECD countries include transfer pricing issues under their general anti- avoidance rules, which permit the tax authorities to re-characterize related party transactions that are artificial or fictitious. (Examples: Congo, Ghana, Kazakhstan, Nigeria, Philippines, Vietnam).

Several of them have also adopted the OECD Guidelines on arm’s-length pricing in recent years (Examples: Egypt, Estonia, Israel, Lebanon, Romania, and Thailand).