A business that is not aware of all of its exposure to the tax policy of each country in which it does business may find itself paying more in taxes that the share of profit it generates. The Organisation for Economic Co-operation and Development (OECD) seeks to reduce the risk of business taxation in multiple countries. Transfer Pricing Handbook explores how countries can apply the OECD Guidelines to tax businesses that conduct their endeavors in more than one country. It is the ultimate comprehensive guide for companies doing business globally.
- Helps companies properly price their goods and services for global markets
- Provides defenses for transfer pricing audits
- Provides standards for creating comparables that multijurisdictional tax administrations will accept
- Guides documentation requirements and timing issues
If you're doing business in more than one country, Transfer Pricing Handbook is a must-have, essential guide for simplifying OECD regulations for your global company.
Table of Contents
Preface xvii
Part I: Basic Transfer Pricing Standards 1
Chapter 1: Introduction 3
Control 4
Tax Havens 5
Complexities 5
Chapter 2: Arm’s Length Principle 7
General Explanation of the Arm’s Length Principle 8
Formal Statement as to the Arm’s Length Principle 10
Comparability Considerations 11
Rationale behind the Arm’s Length Principle 11
Compensation Issues 12
Applying the Arm’s Length Principle to Contribution Analysis 13
Oligopolistic Conditions 14
Transactions That Independent Enterprises Would Not Undertake 15
Administrative Burdens of the Arm’s Length Principle 15
Maintaining the Arm’s Length Principle as the International Consensus 16
Rejection of Alternative Transfer Pricing Approaches 17
Notes 18
Chapter 3: Arm’s Length Range 19
Single-Figure Approach to the Arm’s Length Range 19
Reliability Requirement 20
Comparability Considerations 20
Consequences of Applying More Than One Transfer Pricing Method 21
Selecting the ‘‘Most Appropriate Point’’ in the Range 22
Extreme Results: Comparability Considerations 23
Notes 24
Chapter 4: Safe Harbor Simplification 27
Safe Harbor Burdens and Benefits 28
Defining ‘‘Safe Harbor’’ 29
Scope of the Safe Harbor Provisions 30
How Arbitrary are the Safe Harbor Provisions? 31
Factors Supporting the Use of Safe Harbors 31
Problems That Safe Harbors Present 33
Multiple Jurisdictions 39
Possibility of Opening Avenues for Tax Planning 40
Statistical Data and a Safe Harbor Example 40
Undertaxation 41
Safe Harbor Principles 41
Equity and Uniformity Issues 41
Recommendations as to the Use of Safe Harbors 42
Safe Harbors as Surrender of the Tax Administration’s Discretionary Power 43
Flexible Practices 43
Country-Specific Practices 44
Comprehensive Example 44
Notes 45
Chapter 5: Modifying Safe Harbor Simplification 47
The Study 47
Eleven Specific Transfer Pricing Measures 48
Notes 55
Chapter 6: Global Formulary Apportionment 57
Profit Split Methodologies 58
Global Dealing 58
Attack on Global Formulary Apportionment 58
Impact of the Arm’s Length Principle 59
Comparing Global Formulary Apportionment with the Arm’s Length Principle 60
Double Taxation 60
Lack of a Common Accounting System 61
Factor Selection 62
Transitional Issues 62
Economic Issues 62
Impact of Exchange Rate Movements 63
Compliance Costs and Data Requirements 63
Valuation Difficulties 64
Separate Entity Approach versus Global Formulary Apportionment 64
Bilateral Tax Treaties 65
Members of the Multinational Group Excluded from Global Formulary Apportionment 65
OECD’s Rejection of Non–Arm’s Length Methods 66
Safe Harbors 66
Notes 67
Part II: Transfer Pricing Methodologies 69
Chapter 7: Transactional Profit Split Measures 71
Transactional Profit Split Method Concepts 72
Strengths and Weaknesses of the Transactional Profit Split Method 73
Availability of Comparables in Applying the Transactional Profit Split Method 74
Importance of Functional Analysis in Applying Transactional Profit Split Methods 74
Transactional Profit Split Method Weaknesses 75
Applying Transactional Profit Split Methods 76
Guidelines Profit Splitting Approaches 77
Determining the Combined Profits to Be Split 79
Actual Profits versus Projected Profits 80
Different Profit Measures When Applying the Transactional Profit Split 81
How to Split the Combined Profits 82
Reliance on Comparable Uncontrolled Transactions Data 83
Allocation Keys 83
Reliance on Internal Data 86
Conclusions as to Transactional Profit Split Methods 88
Notes 89
Chapter 8: Profit Split Illustrations 91
Three Basic Assumptions 91
Three Residual Profit Split Alternatives 92
Commentary 96
Notes 97
Chapter 9: Residual Profit Split Examples 99
Presumptions and Preconditions 99
Essential Factual Pattern Conflict 100
Functional Activities 100
Selecting Transfer Pricing Approaches 101
Applying the Residual Profit Split Approach 101
Drafters’ Disclaimer 104
Contribution Approach 104
Notes 105
Chapter 10: Transactional Net Margin Method 107
Initial TNMM Considerations 107
How the Transactional Net Margin Method Works 108
TNMM Reliability 109
Strengths of the TNMM 110
Weaknesses of the TNMM 111
Applying the Comparability Standard to the TNMM 112
Database Issues: The Audio Player Example 114
Impact on the Arm’s Length Range 114
Selecting the TNMM 115
Selecting the Net Profit Indicator 115
Exclusion and Measurability 120
Cases in Which Net Profits are Weighted to Sales 120
Cases in Which Net Profits are Weighted to Costs 121
Cases in Which Net Profits are Weighted to Assets 123
Berry Ratios 124
Other Guidance 126
TNMM Examples 126
How the OECD Views the TNMM 128
Notes 128
Chapter 11: Selecting Profit Indicators 133
Illustration 1 134
Illustration 2 136
Illustration 3 138
Notes 139
Chapter 12: Selecting Transfer Pricing Methods 141
When Can a Business Apply a Multisided Transfer Pricing Method? 142
When Should a Business Not Apply a Multisided Transfer Pricing Method? 144
Part III: Comparability Analysis 147
Chapter 13: How Comparability Analysis Works 149
Determining When Transactions are Comparable 149
Factors and Comparability 152
Functional Analysis 155
Economic Circumstances 161
Business Strategies 162
Return on Investment 164
Recognizing the Actual Transactions Undertaken 165
Associated Enterprises and Independent Enterprises: In Contrast 167
Alternatively Structured Transactions 167
Losses 168
Multinational Enterprises 168
Implementing Business Strategies 169
Impact of Governmental Policies 170
Notes 173
Chapter 14: Comparability Techniques 177
General Comparability Guidance 177
Typical Comparability Processes 179
Broad-Based Analysis of the Taxpayer’s Circumstances 181
Controlled Transaction and Choice of a Tested Party 181
Comparable Uncontrolled Transactions 188
Selecting or Rejecting Potential Comparables 193
Additive Approach 193
Comparability Adjustments 196
Arm’s Length Range 199
Notes 202
Chapter 15: Timing and Comparability 205
Timing of Origin 206
Timing of Collection 206
Valuation That is Highly Uncertain 207
Data from Years Following the Year of the Transaction 208
Multiple-Year Data 208
Compliance Tools 210
Notes 210
Part IV: Administrative Approaches 213
Chapter 16: Transfer Pricing Audits 215
Transactional Profit Split Method 216
Simultaneous Tax Examinations and Transfer Pricing 216
Tax Arrangements 217
Potential Levels of Cooperation between Tax Administrations 218
Examples 220
Notes 224
Chapter 17: Monitoring the Guidelines 227
Understanding the Monitoring Process 228
Method Selection 228
Specific Monitoring Processes 229
Working Party No 6 Peer Reviews 229
Three Peer Review Levels 230
Peer Review Selection Criteria 231
Difficult Case Paradigms 231
Biennial Members of Tax Examiners 232
Business Community Involvement 233
Business Industry Advisory Committee 233
Business’s Role in Contributing to the OECD 235
Peer Reviews and the Business Community 235
Business Community’s Updates on Legislation and Practice 236
Role of the U.S. Council for International Business 236
Notes 237
Part V: Advanced OECD Analysis 239
Chapter 18: Documentation Requirements 241
Introductory Issues and Burden of Proof 241
Guidance on Documentation Rules and Procedures 242
Useful Information for Determining Transfer Pricing 244
Summary of Recommendations on Documentation 245
Notes 245
Chapter 19: Intangible Property 247
Basic OECD Intangible Property Provisions 247
Future Intangible Property Developments 248
Arm’s Length Intangible Property Issues 249
OECD Intangible Property Developments 249
Soft Intangibles 250
Highly Uncertain Valuation Issues 250
Steps That an Independent Enterprise Might Undertake to Resolve Uncertainty 251
Tax Administrator’s Response 253
Timing Considerations 254
OECD Highly Uncertain Valuation Examples 254
What the OECD Should Do Now 259
Notes 260
Chapter 20: Service Arrangements 263
Overview 263
Scope of Intragroup Arrangements 264
Shareholder Activities and Stewardship Activities 267
Adjusting to the Form of the Arm’s Length Consideration 270
‘‘On Call’’ Services 270
Evaluating ‘‘On Call’’ Services 271
Determining an Arm’s Length Charge for the Intragroup Service 272
Including Service Costs in the Transfer of Goods 275
Double-Taxation Risks 276
Examining the Actual Use of the Services 276
Calculating the Arm’s Length Consideration 276
Applying Transfer Pricing Methods 277
Functional Analysis 278
Business Strategies: Profits for the Service Provider 278
Applying the Cost-Plus Method for Intragroup Services 279
Cost-Benefit Issues and Safe Harbor 280
Intragroup Service Examples 281
Specialized Services 283
Multinational Service Enterprises 283
Specialized Service Industries 284
Applying the Transactional Profit Split Method to Services 284
Notes 285
Chapter 21: Cost Contribution Arrangements 289
Overview 289
Cost Contribution Arrangement Criteria 291
Mandatory CCA Arm’s Length Requirements 296
Applying an Applicable Allocation Key 300
Tax Treatment of Contributions and Balancing Payments 302
Entry, Withdrawal, and Termination of a Cost Contribution Arrangement 306
Recommendations for Monitoring and Structuring Cost Contribution Arrangements 309
Documentation 310
Notes 312
Chapter 22: Business Restructuring 315
Special Risk Considerations 316
Compensation for Undertaking the Restructuring 318
Postrestructuring Remuneration 321
Recognition of the Actual Transactions Undertaken 323
Notes 325
Part VI: Putting The Guidelines to Work 327
Chapter 23: Malaysia-Singapore Allocation Keys 329
Importance of Allocation Keys 329
When the Transactional Profit Split Method is the ‘‘Most Applicable’’ Transfer Pricing Method 330
Specialized Services 331
Applying the Transactional Profit Split Method 332
Four Allocation Key Categories 333
Key Functions 333
Selecting Potential Allocation Keys 334
Selecting among Allocation Keys 336
‘‘Strong Correlation’’ Standard 337
Allocation Keys 337
Transfer Pricing Strategies 342
Notes 343
Chapter 24: China-Taiwan Trade 345
Taiwan and China: A History Lesson 345
Tax Considerations 348
Transactional Profit Split Method Criteria 352
APA Process 355
Notes 356
Chapter 25: Reverse Engineering the Transfer Pricing Process 357
Transactional Profit Split 358
Simultaneous Tax Examinations and Transfer Pricing 358
Tax Arrangements 359
How the Reverse Engineering Transfer Pricing Process Works 367
Functional Analysis Considerations 369
Transactional Profit Split Method 370
Success Parameters to the Reverse Engineering Process 370
Synergistic Activities 371
Undertaking Multijurisdictional Production Processes 372
Engaging in Extensive R&D Activities 373
Dealing in Unique Intangibles 374
Participating in a Cost Contribution Arrangement 374
Creating or Providing Specialized Services 375
Distributions of Generic Goods or Standardized Goods 376
Contract Manufacturers and Contract Service Activities 377
Planning 377
International LP Gas Companies Face Multinational Tax Claims 377
Multinational Service Enterprises 379
Notes 380
Part VII: Connecting Transfer Pricing and Permanent Establishment 383
Chapter 26: Permanent Establishment Parameters 385
OECD’s Permanent Establishment Provisions 386
Overall Tax Considerations 388
OECD Approach to Determine Permanent Establishment 389
Hong Kong Applies the OECD Permanent Establishment Provisions 389
Common Law Permanent Establishment Criteria 391
Declining Businesses 394
‘‘Preparatory to’’ and ‘‘Auxiliary from’’ Exemptions 395
Will the OECD Approach Prevail? 395
Notes 396
Chapter 27: Focus on Permanent Establishment 397
Background Considerations 398
Twenty-five Proposed Changes 398
Notes 413
About the Authors 415
Index 417
