Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions. Transfer pricing issues originally arose in transactions between associated enterprises operating within the same tax jurisdiction. The domestic issues are not considered in these Guidelines, which focus on the international aspects of transfer pricing. These international aspects are more difficult to deal with because they involve more than one tax jurisdiction and therefore any adjustment to the transfer price in one jurisdiction implies that a corresponding change in another jurisdiction is appropriate. However, if the other jurisdiction does not agree to make a corresponding adjustment the MNE group will be taxed twice on this part of its profits. In order to minimise the risk of such double taxation, an international consensus is required on how to establish for tax purposes transfer prices on cross-border transactions ...

In applying the foregoing principles to the taxation of MNEs, one of the most difficult issues that has arisen is the establishment for tax purposes of appropriate transfer prices. Transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises. For purposes of these Guidelines, an “associated enterprise” is an enterprise that satisfies the conditions set forth in Article 9, sub-paragraphs 1a) and 1b) of the OECD Model Tax Convention. Under these conditions, two enterprises are associated if one of the enterprises participates directly or indirectly in the management, control, or capital of the other or if “the same persons participate directly or indirectly in the management, control, or capital” of both enterprises (i.e. if both enterprises are under common control). The issues discussed in these Guidelines also arise in the treatment of permanent establishments as discussed in the Report on the Attribution of Profits to Permanent Establishments that was adopted by the OECD Council in July 2010, which supersedes the OECD Report Model Tax Convention: Attribution of Income to Permanent Establishments (1994). Some relevant discussion may also be found in the OECD Report International Tax Avoidance and Evasion (1987) ...

A significant volume of global trade consists of international transfers of goods and services, capital and intangibles within MNE groups and thus between related parties. Transactions between related parties are referred to as “controlled” transactions, as distinct from “uncontrolled” transactions between independent companies. The forces that regulate pricing of transactions between independent parties are known as “marked forces”. Independent parties can be assumed to operate in their own self-interest (“on an arm’s length basis”) in negotiating terms and conditions for transactions. Put in simple terms an independent seller would want to sell at the highest price and an independent buyer would want to buy at the lowest price – and the price agreed between the two independent parties would be determined in an equilibrium of these two opposite forces. Absent regulation, pricing of controlled transactions within MNE Groups would be determined by forces that differs from those that govern pricing between independent parties – e.g. the overall group profit and taxation. This would result in (1) obstructions to world trade as competition between MNE groups and local businesses would not be at equal footing, and (2) erosion of taxing right in souvereign contries due to MNEs reallocating  profits and tax bases in group companies operating in high tax counties to low tax countries.  For these reasons regulation is needed. “Transfer pricing” is the general term used for regulation of pricing and terms in controlled transactions. In most countries transfer pricing is governed by the Arm’s length principle. Transfer pricing regulations would allow for an adjustment  in the example above. The price of 90 set in the controlled transaction between related parties would be reduced to 80 based on the price agreed between independent parties under comparable circumstances. The authoritative statement of the arm’s length principle is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries and on which most countries internal regulations are based. Article 9 provides: [Where] conditions are made or imposed between the two [associated] 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. By seeking to adjust profits in MNEs by reference to the conditions which would have obtained between independent enterprises in comparable transactions and comparable circumstances, the arm’s length principle follows the approach of treating the members of an MNE group as if they were operating as separate entities rather than as inseparable parts of a single unified group. Transfer pricing does not necessarily involve tax avoidance, as the need to set such prices is a normal aspect of how MNEs must operate. Where the pricing does not accord with internationally applicable norms or with the arm’s length principle under domestic law, the tax administration may consider this to be “mis-pricing”, “incorrect pricing”, “unjustified pricing” or non-arm’s length pricing, and issues of tax avoidance and evasion may potentially arise ...

Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions. Transfer pricing issues originally arose in transactions between associated enterprises operating within the same tax jurisdiction. The domestic issues are not considered in these Guidelines, which focus on the international aspects of transfer pricing. These international aspects are more difficult to deal with because they involve more than one tax jurisdiction and therefore any adjustment to the transfer price in one jurisdiction implies that a corresponding change in another jurisdiction is appropriate. However, if the other jurisdiction does not agree to make a corresponding adjustment the MNE group will be taxed twice on this part of its profits. In order to minimise the risk of such double taxation, an international consensus is required on how to establish for tax purposes transfer prices on cross-border transactions ...

In applying the foregoing principles to the taxation of MNEs, one of the most difficult issues that has arisen is the establishment for tax purposes of appropriate transfer prices. Transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises. For purposes of these Guidelines, an “associated enterprise” is an enterprise that satisfies the conditions set forth in Article 9, sub-paragraphs 1a) and 1b) of the OECD Model Tax Convention. Under these conditions, two enterprises are associated if one of the enterprises participates directly or indirectly in the management, control, or capital of the other or if “the same persons participate directly or indirectly in the management, control, or capital” of both enterprises (i.e. if both enterprises are under common control). The issues discussed in these Guidelines also arise in the treatment of permanent establishments as discussed in the Report on the Attribution of Profits to Permanent Establishments that was adopted by the OECD Council in July 2010, which supersedes the OECD Report Model Tax Convention: Attribution of Income to Permanent Establishments (1994). Some relevant discussion may also be found in the OECD Report International Tax Avoidance and Evasion (1987) ...