TRANSFER PRICING CASE STUDIES

WORKSHOP

SAN JOSE

31 MARCH - 4 APRIL 2014

3-a. Transfer Pricing - Introduction

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OECD freely authorises the use of this material for non-commercial purposes. All requests for commercial uses of this material or for translation rights should be submitted to rights@oecd.org.The opinions expressed and arguments employed herein are those of the author and do not necessarily reflect the official views of the OECD or of the governments of its member countries.

ManufacturerParent Co.

Wholesale distributor

for Central American

Region

• Is there a transfer pricing issue?•What are the risks to businesses

and governments?

Distributor

for each country

End-Customers

What is Transfer Pricing?

Goods

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What is Transfer Pricing?

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Relevance of the Subject

• Approximately 60-70% of world trade is carried on within Multinational Groups of Enterprises (MNEs)

• Cross-border dimension of transactions...

...due to globalisation and economies of scale

• Transfer prices ... are prices at which an enterprise transfers goods, services or intangible property to associated enterprises

What is an “associated enterprise”?

• Definition in Article 9 OECD Model Tax Convention:

“Direct or indirect participation in the

– management,

– control or

– capital of an enterprise”

• No minimum level of participation

• Enterprises are associated where:– one enterprises participates in the management control or

capital the other, or

– the same person(s) participate in the management, control or capital of both

Definition of “Associated Enterprises”

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• Potentially quite wide

• Domestic rules may refine or expand what transactions or arrangements are subject to the transfer pricing rules

– Shareholding (de jure control): sometimes > 50%

– De facto control, e.g. • same directors in both enterprises

• sole customer or supplier

– Association need not be proven

Participation in management, control or capital

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Company A

Company B

Company C

51%

26%

Are A and C associated enterprises?

Participation in management, capital or control

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Other share-holders

Company A

Company B

Company C

Transaction

Are B and Dassociated enterprises?

51%

51%

26%

Company D

Control

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Reliance on the Arm‘s Length Principle (ALP)...

...contained in Article 9 (1) OECD Model Tax Convention

ALP entails the Separate Entity Approach, i.e. associated enterprises are taxed as if they were dealing wholly independently (i.e. at arm‘s length)

“Where...conditions...in [the] commercial or financial relations [between the associated enterprises] which differ from those which would be made between independent enterprises”

“...profits which would...have accrued...may be included in the profits of the enterprise and taxed accordingly”

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Relevance of the Subject

* Also applicable to the UN Model Double Taxation Convention. ALP may also be mentioned in legislation (enacted in domestic law), regulations, rulings, case law or guidelines.

OECD MTC basis for 3,600 legally binding bilateralIncome & Capital Tax Treaties

Arm’s Length Principle*embodied in Article 9 (1)

OECD MTC

OECD MTC and OECD TPG

OECD TPG interpretative tool for Article 9 of the MTC

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Consensus definition of the arm’s length principle

Pricing methods and guidance used by countries around the world

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OECD Transfer Pricing Guidelines

• Chapter I: Guidance for applying the ALP

• Chapter II: Transfer Pricing Methods

• Chapter III: Comparability Analysis

• Chapter IV: Administrative approaches to avoiding &resolving TP disputes (MAP, APAs, etc.)

• Chapter V: Documentation

• Chapter VI: Intangibles

• Chapter VII: Intra-Group Services

• Chapter VIII: Cost Contribution Arrangements

• Chapter IX: Business Restructurings12

OECD Transfer Pricing Guidelines

Transfer pricing and profit shifting

ManufacturerCountry A

Costs = 100

Intra-GroupTransaction Distribution Subsidiary

Country BResale Price = 300

Arm’s LengthTransfer Price

150?200?250?300?350?

Profit A 50 100 150 200 250

Gross Profit B 150 100 50 0 - 50

Group Profit 200 200 200 200 200

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Transfer Pricing and profit shifting

ManufacturerCountry A

Costs = 100

Intra-GroupTransaction Distribution Subsidiary

Country BResale Price = 300Transfer Price

250

Profit A = 150Tax 10% = 15

Profit B = 50Tax 30% = 15

Total = 200Total = 30

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Transfer Pricing and profit shifting

ManufacturerCountry A

Costs = 100

Intra-GroupTransaction Distribution Subsidiary

Country BResale Price = 300Transfer Price

300

Profit A = 200Tax 10% = 20

Profit B = 0Tax 30% = 0

Total = 200Total = 20

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Transfer Pricing Adjustment andEconomic Double Taxation

ManufacturerCountry A

Costs = 100

Intra-GroupTransaction

Distribution SubsidiaryCountry B

Resale Price = 300Transfer Price300

Transfer Pricing Adjustment by B (50)250

Profit A = 200Tax 10% = 20

Profit A reported = 200Tax 10% = 20

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Profit B = 0Tax 30% = 0

Profit B adj. =+50Tax 30% = 15

Total = 200Total = 20

Total = 250Total = 35

Transfer Pricing Adjustment andEconomic Double Taxation

ManufacturerCountry A

Costs = 100

Intra-GroupTransaction

Transfer Price 300

Distribution SubsidiaryCountry B

Resale Price = 300

Transfer Pricing Adjustment by B (50)250

Profit A = 200Tax 10% = 20

Profit A reported = 200Tax 10% = 20

Profit doubly taxed = 50

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Profit B = 0Tax 30% = 0

Profit B adj. =+50Tax 30% = 15

Total = 200Total = 20

Total = 250Total = 35

Elimination of Double Taxationby Corresponding Adjustment

ManufacturerCountry A

Costs = 100

Intra-GroupTransaction

Transfer Price 300

Distribution SubsidiaryCountry B

Resale Price = 300

Total = 250 Total = 35

Total = 200

Total = 30

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Profit A reported = 200Tax 10% = 20

Profit A reported = 200Corr. adjustment - 50Profit A adjusted = 150Tax 10% = 15

Corresponding adjustment by A (-50)

Profit B adj. = +50Tax 30% = 15

Profit B adj. = 50

Tax 30% = 15

Questions and/or comments?