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OECD transfer pricing guidelines for multinational enterprises and tax administrations 2022

Base erosion and profit shifting, the historic global initiative where over 135 countries and tax jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment has come out with its 658 pages transfer pricing guidelines which would form the convex for multi- national enterprises to enable sharing of 150-240 US Billion dollars reportedly lost by developing nations to the developed ones.

Let us learn its contours for updating our eager intellect.

Being updated from 1979 onwards at OECD level, these guidelines have ample scope for further refinements.

10 chapters as narrated below lead us the way.

Chapter 1. Arm’s length principle

Chapter 2. Transfer pricing methods

(Chapter 2. Part 1 -Selection of transfer pricing method, Part 2 – Traditional transaction methods, and Part 3 – Transactional profit methods)

Chapter 3. Comparability analysis

Chapter 4. Administrative approaches to avoiding and resolving transfer pricing disputes.

Chapter 5. Documentation

Chapter 6. Special considerations for intangibles

Chapter 7. Special considerations for intra-group services

Chapter 8. Cost contribution arrangements

Chapter 9. Transfer pricing aspects of business restructurings: Introduction, Part 1 – Arm’s length compensation for restructuring itself, Part 2 – Remuneration of post restructuring-controlled transactions.

Chapter 10. Transfer pricing aspects of financial transactions.

12 annexures further adorn the guidelines.

What is an arm’s length principle?

Let us explain in simple language.

Associated companies of any multi national company would operate with income and expenses as if they are operating at commercial terms though not linked. The tax administrations welcome this legal behavior of the entities. Reemphasizing their meeting the definition as per article 9 of OECD Model tax convention, the guidelines proceed further.

For obvious reasons, these guidelines would play a vital role in tax proceedings and arbitration deals among the tax administrations and multi-national enterprises.

For example, purchase and sale of commodities, and lending operations among enterprises do fall under this category. The other suggested approach, namely, global formulary apportionment has not found approval among tax administrations.

1.1 to 1.193 vividly explains various situations and the steps needed to uphold the above principle. Interspersed with various examples, it is a pleasure to read, interpret and apply as the situations may need, both for administrations as well as the enterprises involved in such situations.

1.2 Let me broadly lay down some of the extensive contours of the mentioned details.

Guidance for applying arm’s length principle, as obtained from the report with pages intact.

a) Identifying the commercial or financial relations such as the market in which the associated companies operate, the nature of industries like pharmaceuticals, mining, finance etc., the functions performed by each of the companies, the comparable terms of operations, and the business strategies performed is one of the important features of the above principle.

b) Recognition of the accurately delineated function: whether the actual operation undertaken coincides with the contracts entered and can it be actually delineated? Company 1 is operating in a commercial area with machinery and holding inventory prone to frequent flooding and destruction. Company 2 an associated company provides insurance at 80% of the total cost the above assets contravening the commercial wisdom of insurers who refuse to undertake this task which is no insurance. This will be studied by tax authorities for necessary action.

c) Losses: The transfer pricing policies need revision if one of the associated company continuously incurs loss while the group as a whole makes good profits?

d) Effect of government policies: The government of the nation may intervene with exchange rate policies, analysis of management fees/royalties paid for foreign partner, subsidies to the particular industry, anti-dumping duties etc.

e) Customs valuations: Whether the custom authorities would avoid comparison between the value of goods imported by an associate company from its exporter who is related as compared to the value of goods imported by an independent company in the same market?

f) Location savings and other market features: Whether the benefits of location savings being passed on to other independent customers or suppliers with valuation of the transactions undertaken, nature of services or goods supplied etc.? The other market features do affect the above principle under discussion.

g) Assembled workforce: Assembly of experienced or uniquely qualified employees may play a vital role in transfer pricing terms which may not qualify under arm’s length principle.

BEPS – Latest OECD Transfer Pricing Guidelines – 2022

Chapter 2: Selection of the particular transfer pricing methods, either Traditional transaction methods, or Transactional profit methods has been discussed in detail by OECD countries while finding out the most appropriate method to arrive at a convenient way to study the pricing ways of transfer pricing . 2.01 to 2.12 analyses the selection of the most appropriate method though in practice, no one method qualifies to satisfy the requirements.

The traditional transaction methods are the comparable uncontrolled price method, the resale price method, and the cost-plus method.

Adequate discussion takes place among the pages 99-114. Transactional profit methods get detailed coverage under pages 115 – 148.

Chapter 3: Comparability analysis: Let me narrate a simple process which needs to be followed during the study of comparability analysis of transfer pricing methods to be applied.

  • The years under study
  • Broad based analysis of tax payer’s circumstances
  • Whether to use transactional profit method as a means to study transfer pricing facts under controlled situation.
  • Review of any existing comparable facts for reference purposes.
  • Can we get any outside information from similar situations of companies?
  • Is it possible in any other non- comparable example of any uncontrolled situation?
  • Are we to apply some corrections?

Let me give an actually happening situation. A is involved with B as associates and supplies non tangibles like patents, trademarks, strategies for marketing, and manufacturing set up if need be but charges for every thing as a set up package. How to study every one of above components separately or as a package which involves too much leeway for A. Do the tax administrations use all available data from some other companies? Proper transfer pricing method and its application depends from circumstances, timing, country of happening etc.

Yes, administrators of tax authorities do have enough data bases to study various situations.

The ultimate arm’s length principle which is the basis of tax authorities requires all types of compilation of data to generate enough tax income for any nation and it is not unrealistic to big MNEs to reduce tax burdens in any manner possible.

What should be the administrative approach of tax authorities to avoid double taxation for its tax payers who contribute substantial tax income?

Chapter 4 deals exclusively how tax authorities of various nations deal with transfer pricing methods like identification of similar issues, preparing broad guidelines if possible with the available data, even from same group as applied in other nations with similar economic situations, how the tax authorities may collaborate among themselves by exchange of concrete data among themselves by involving the companies concerned, all under concrete legal administrative steps among themselves, mostly by tax treaties as recommended by OECD or IMG models. Arbitration procedures are getting priorities over courts to avoid time, money and reputations.

One can easily recollect the recent tax disputes involving many MNCs with Indian tax authorities who were forced to come to adjustments to tax payers when the properties of Indian governments were taken away in foreign countries due to arbitration proceedings falling in favor of tax payers who won the arbitration abroad.

Chapter 5 deals with documentation.

Transfer pricing agreement or enquiry need proper documentation either from tax authorities to the tax payees or vice versa.

A simple analysis puts the onus on the tax payment of corporate enterprises involved in transfer pricing transactions to provide certain papers for justifying their claims, to be used by tax authorities to make the required assessment and also to use them in future in similar transactions.

Simply put in common parlance, it may be a master file, a local file and country-to-country report. To a valid question whether the cost of transactions will define the documentation requirements or the value of whole transactions, different jurisdictions have defined their own approaches to meet essential requirements. Suffice to say that enough progress is being made on day-to-day basis to audit, see, or enquire whole data depending on the transactions, entities involved and their past performance with tax authorities. Pages 235-245 amplify these topics.

Chapter 6 – special consideration for intangibles, the ever contested matter which involves huge tax gains for enterprises and a close look up from tax authorities.

Let us name a few of the most popular brands like coca cola, Philips, Colgate Palmolive or Unilever. One hardly hears about the vast disputes that emerge with these enterprises with their vast reach to the plethora of nations, immensely valued products and essentials that rule the ordinary lives of a common people around the world.

Marketing intangibles, trade intangibles etc., are some of the popularly referred ones.

In a detailed parlance, patents, know-how and trade secrets, trademarks, trade names, brands, rights under contracts and licenses (sale of bandwidth by government, or release of licenses for mining), goodwill and ongoing concern values., have merited detailed mentions under this chapter.

Development, enhancement, maintenance, protection and exploitation of intangibles cover some of the core functions that are identified, who in the group of MNEs actually undertakes the functions, the time span to develop them, the time of usage, and if any costs/charges are levied by any one of the MNEs, it is justified and if so, up to what extent?

Can the above details available for various individual units who do one or more of the functions and extend their expertise to the outside domain which can pay for the expertise? If so, under transfer pricing guidelines, can arm’s length principle be applied with the vast information available with the tax authorities of the nations?

Since OECD countries had been dealing with transfer pricing guidelines with above complex matters, it is possible they have accumulated enough materials to arrive at the solutions which may be acceptable to all nations dealing with this matter.

Let us recall the recent admission of GM seed for mustard which is expected to increase the production by 20% onwards for agriculturists has been in the discussion stage for various decades. In that case, it is expected that the involved parties would negotiate appropriate price for their research and development over the years.

Some of the methods mentioned for usage under transfer pricing guidelines for intangibles include cup method, and transactional profit split method has been discussed in detail.

Pages 247-311 cover this topic with copious examples.

Chapter 7. Special consideration for inter-group services

Every MNE group has to arrange for wide range of services like technical, administrative, financial, and commercial services. Such services do include managerial, co-ordination, and control functions for the whole group.

Some of the issues arising from above functions: Whether inter-group services were actually rendered?

Costs related to shareholder activities undertaken by parent company:

  • Shareholder costs of the parent company like the costs related to shareholder meetings, legal reporting requirements(As per company’s law in Indian context and hundreds of requirements like reporting to controlling entities), works related to tax laws, costs related to raising of funds, audit costs, preparation of company accounts and the internal accounting team costs etc.
  • What are the implications if similar services were rendered to independent companies with arm’s length principle?
  • Direct and indirect charge methods are usual applied ones in this regard.
  • Some transfer pricing activities for considerations with regard to factoring services in debt collection, setting up of manufacturing operations along with assembly operations for each product, location etc. Research for individual company at their behalf is not uncommon since the research results may help others also in the same group.
  • One can recollect soaps like pears, lux, shampoos like Dove, all types of tooth pastes from Colgate Palmolive, sports shoes from Vietnam, Malaysia, South Korea, Japan do emphasize the above facts.

Chapter 8. Cost contribution arrangements: Popularly known as CCA, these are transactions undertaken for associated companies and to define their actual costing guidelines like arm’s length principle is applied and is it comparable to other CCA among other MNEs operating in similar or in the same country or similar lines of operations for providing services, usage of intangible, same methods of establishing industries,

If one member or group of members do collaborate among themselves for CCA, what will be the cost for other members who would like to share the cost and get the required benefits which may be too large?

Countries like India, China, U.K., U.S.A., or European markets through OECD have developed the required expertise to deal with transfer pricing costs to be dealt with by tax authorities or the affected tax paying enterprises.

Chapter 9. Transfer pricing aspects of business restructurings: Business structuring refers to cross – border relations among associated companies on commercial or financial relations. The relationship with suppliers, contract manufacturers, legal/accounting/tax consultancy for the group as a whole or undertaken by one for others at a cost. If so, what are transfer pricing implications from tax authorities points of view? It is not uncommon to see the labels of products proudly proclaiming contract manufacturers who extend their services for production, marketing services, in some cases research for any issues raised by the parent company or the associated companies.

The CCA among the companies of any group or groups including their suppliers or others explained above is dealt with for transfer pricing costs angles.

What is the compensation, documentation both from the parent company’s angle or from tax authorities/government concerned from transfer pricing angle gets ample discussion during the pages 357-391.

Chapter 10. Transfer pricing aspects of financial transactions: Some of the topics enshrined during the pages 403-453 include basic introduction, interaction with guidance in section D-1 of Chapter1, identification of transaction as commercial or financial, relations, economically relevant characteristic of actual financial transactions, treasury function, inter-group loans, cash pooling, hedging, financial guarantees, determining the arm’s length principle of guarantees offered, captive insurance, arm’s length price for these services, etc. get ample discussion with enough examples for proper understanding.


With the globalization of the world economy and India offering an excellent alternate path for manufacturing, distribution, exports/imports or offering of world level soft power at the most competitive price, enormous reach of Indian medicine, dairy products, agricultural commodities both as normal ones or on a organic platform along with the proven results of Indian medicines in the recent world pandemic which saved millions of human lives, transfer pricing gets the most important value in taxing efforts of the countries who number 136 among various tax administrations. OECD as a beckon of intellectual reservoir for the world of tax among nations, tax payers and others has drawn detailed transfer pricing discussion which has evolved since 1986. Let us learn the detailed instructions for serving our tax clients, various governments as well as the universities teaching commerce/economics/tax/ or management.


Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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April 2024