A large proportion of world trade consists in cross-border transactions within multinational enterprises (“MNEs”), where branches or subsidiaries of the same MNE group exchange goods, services or intangibles. These transactions, referred to as “controlled transactions”, are not subject to the same market forces as transactions between independent enterprises. There is a risk that the taxable profits derived from controlled transactions may not reflect the economic contributions made by the parties in each country involved.

The international consensus on transfer pricing is the arm’s length principle, according to which the profits made by an associated enterprise from controlled transactions should be comparable to the profits that it would have realised if it had been dealing in comparable conditions with an independent enterprise. The arm’s length principle is embodied in Article 9 of the OECD Model Tax Convention and in the domestic legislation of OECD and many non-OECD economies. The Transfer Pricing Guidelines provide guidance on its application.

The application of the arm’s length principle helps governments 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. It also limits the risks of economic double taxation that may result from a dispute between two countries on the determination of the remuneration for cross-border transactions between associated enterprises.

The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations were adopted by the OECD Council in their original version in 1995 and have since been amended and supplemented with new chapters and annexes to address the challenges posed by the globalised and increasingly complex economic context in which MNEs operate. The most recent update was approved by the OECD Council in July 2010.

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