by Ulrike Lomas, Tax-News.com, Brussels 15 September 2009

The OECD has published proposed revisions to Chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

The 2009 edition of the OECD Transfer Pricing Guidelines (TPG), which has also just been published, incorporates an update of Chapter IV to reflect the latest developments in the area of dispute resolution as well as updates to the Foreword, Preface and Council Recommendation. It was released in time for the Conference on Transfer Pricing and Treaties in a Changing World.

Since their adoption by the OECD Council in 1995, the TPG have been under constant monitoring by the OECD. They provide guidance on the application of the arm's length principle to the pricing, for tax purposes, of cross-border transactions between associated enterprises. The OECD states: 'in a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s length remuneration for their cross-border transactions with associated enterprises'.

The main proposed changes in this update of the existing guidance on comparability and profit methods are as follows:

• Hierarchy of transfer pricing methods: In the existing TPG, there are two categories of OECD-recognized transfer pricing methods: the traditional transaction methods (described at Chapter II of the TPG) and the transactional profit methods (described at Chapter III). Transactional profit methods (the transactional net margin method and the profit split method) currently have a status of last resort methods, to be used only in the exceptional cases where there are no or insufficient data available to rely solely or at all on the traditional transaction methods. Based on the experience acquired in applying transactional profit methods since 1995, the OECD proposes removing exceptionality and replacing it with a standard whereby the selected transfer pricing method should be the “most appropriate method to the circumstances of the case." In order to reflect this evolution, it is proposed to address all transfer pricing methods in a single chapter, Chapter II (Part II for traditional transaction methods, Part III for transactional profit methods).
• Comparability analysis: The general guidance on the comparability analysis that is currently found at Chapter I of the TPG has been updated and completed with a new Chapter III containing detailed proposed guidance on comparability analyses.
• Guidance on the application of transactional profit methods: Proposed additional guidance on the application of transactional profit methods has been developed and included in Chapter II, new Part III.
• Annexes: Three new Annexes have been drafted, containing practical illustrations of issues in relation to the application of transactional profit methods and an example of a working capital adjustment to improve comparability.

Interested parties are invited to submit comments by January 9, 2010.

This comprehensive report in our Intelligence Report series examines the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns, including summaries of recent developments in design of the corporate supply train, the usefulness of 'offshore' in international corporate tax planning, and a section covering the spread of DTAAs and CFC laws. It is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report16.asp