OECD Transfer Pricing Guidelines

Excerpt from Practical European Tax Strategies by Peter Hann (KPMG in the UK)



The OECD has been moving rapidly with its projects to revise the transfer pricing guidelines and to issue a new version of the Model Tax Convention. Revised transfer pricing guidelines will be issued within the next few years, while the new version of the Model Tax Convention is expected to be finalized as soon as June 2008. The main issues relating to transfer pricing are summarized below.


Transfer Pricing Guidelines

Profit-based Methods

Following consideration of the responses to a consultation held in 2006 on transactional profit methods, in January 2008 the OECD published “issues notes” on various aspects of profi t based methods as part of a further consultation exercise.

The OECD working party has been examining the status of the transactional profit methods (transactional net margin method and profit split), which are at present regarded as methods of last resort in the OECD guidelines. The working party has tentatively concluded that the correct guidance on the approach to the selection of a transfer pricing method is to emphasize that the method used should take into account the appropriateness of that method in view of the functional analysis and comparability analysis, and also taking into account the strengths and weaknesses of the OECD recognized methods. This should also involve consideration of the availability of reliable information, especially of uncontrolled comparables, and the degree of comparability including the reliability of comparability adjustments that would need to be made.

The OECD Working Party takes the view that the traditional transactional methods (comparable uncontrolled price (CUP), resale price method and cost plus) have intrinsic strengths. Their latest proposal in these issues notes would, however, remove the exceptional status of the profit methods and put more emphasis on the functional analysis to determine the appropriate transfer pricing method and on the consideration of the relative strengths of the different methods in a particular case.

Owing to the intrinsic strengths of the traditional transactional methods, the OECD still considers that when a traditional transactional method and a transactional profit method can be applied in an equally reliable manner, the traditional transactional method is to be preferred.


Read More on the issues addressed in the “issues notes” published as part of the consultation: