Transfer Pricing: OECD Transfer Pricing Rules and Guidelines describes, on a chapter by chapter basis, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the Organisation for Economic Co-operation and Development (OECD). The authors, Robert E. Culbertson, Esq., Michael C. Durst, Esq., and David B. Bailey, Esq. of Kind & Spalding LLP, incorporate into their approach historical and conceptual, as well as technical, analysis. The analysis is designed to prove useful to practitioners who seek to make maximum use of the Guidelines in fashioning tax plans that will be defensible in examinations by tax authorities around the world, and also in defending taxpayers’ positions where necessary.

Emphasis is placed on the legal relationship between the Guidelines and the national transfer pricing laws of the United States and other countries. Suggestions are offered at various points of ways in which the Guidelines might be clarified, particularly (but not exclusively) in their treatment of transfer pricing for intangibles, both in and outside the context of cost sharing arrangements.

This Portfolio includes comprehensive coverage of

• The Arm's Length Principle
• Traditional Transaction Methods including the Comparable Uncontrolled Price (“CUP”) Method, the Resale Price Method, and the Cost Plus Method
• Special Considerations for Intangible Property
• Special Considerations for Intra-Group Services
• Cost Contribution Arrangements

Transfer Pricing: OECD Transfer Pricing Rules and Guidelines allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.

Detailed Analysis

Chapter 20: TRANSFER PRICING: OECD TRANSFER PRICING RULES AND GUIDELINES by Robert E. Culbertson, Esq., Michael C. Durst, Esq. and David B. Bailey, Esq., King & Spalding LLP, Washington, D.C.

I. Introduction

A. The OECD

B. Legal Authority of the Guidelines

C. Historical Predecessors of the Current Guidelines

D. Immediate Background of the Current Guidelines

II. Chapter I of the Guidelines: The Arm's Length Principle

A. Introduction

B. Statement of the Arm's Length Principle

C. Guidance for Applying the Arm's Length Principle

1. Comparability Analysis

a. Reasons for Examining Comparability

b. Factors Determining Comparability

(1) Characteristics of Property or Services

(2) Functional Analysis

(3) Contractual Terms

(4) Economic Circumstances

(5) Business Strategies

2. Recognition of the Actual Transactions Undertaken

3. Evaluation of Separate and Combined Transactions

4. Use of an Arm's Length Range

5. Use of Multiple Year Data

6. Losses

7. The Effect of Government Policies

8. Intentional Set-Offs

9. Use of Customs Valuations

10. Use of Transfer Pricing Methods

III. Traditional Methods

A. Introduction

B. Relationship to Article 9

C. Types of Traditional Transaction Methods

1. Comparable Uncontrolled Price ("CUP") Method

2. Resale Price Method

3. Cost Plus Method

D. Relationship to Other Methods

IV. Other Methods

Introductory Material

A. Introduction

B. Transactional Profit Methods

1. Profit Split Method

a. In General

b. Strengths and Weaknesses

c. Guidance for Application

2. Transactional Net Margin Method

a. In General

(1) Preliminary Comments

(2) Introductory Discussion in Guidelines

b. Strengths and Weaknesses

c. Guidance for Application

(1) The Comparability Standard to Be Applied to the TNMM

(2) Other Guidance

3. Conclusions on Transactional Net Profit Methods

C. A Non-Arm's Length Approach: Global Formulary Apportionment

V. Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes

A. Introduction

B. Transfer Pricing Compliance Practices

1. Examination Practices

2. Burden of Proof

3. Penalties

C. Corresponding Adjustments and the Mutual Agreement Procedure

D. Simultaneous Examinations

E. Safe Harbors

F. Advance Pricing Arrangements (APAs)

G. Arbitration

VI. Documentation

VII. Special Considerations for Intangible Property

Introductory Material

A. Introduction

B. Commercial Intangibles

1. In General

2. Examples: Patents and Trademarks

C. Applying the Arm's Length Principle

1. In General

2. Identifying Arrangements Made for the Transfer of Intangible Property

3. Calculation of Arm's Length Consideration

4. Arm's Length Pricing when Valuation Is Highly Uncertain at the Time of the Transaction

D. Marketing Activities Undertaken by Enterprises Not Owning Trademarks or Tradenames

VIII. Special Considerations for Intra-Group Services

A. Background

B. Introduction

C. Main Issues

1. Identifying Intra-Group Services

2. Determining an Arm's Length Charge

3. Calculating the Arm's Length Consideration

D. Some Examples of Intra-Group Services

IX. Cost Contribution Arrangements

A. Introduction

B. Definitional Portions of Chapter VIII

1. Introduction

2. Concept of a CCA

a. In General

b. Relationship to Other Chapters

c. Types of CCAs

C. Applying the Arm's Length Principle

1. In General

2. Determining Participants

3. The Amount of Each Participant's Contribution

4. Determining Whether the Allocation Is Appropriate

5. The Tax Treatment of Contributions and Balancing Payments

D. Tax Consequences if a CCA Is Not Arm's Length

1. Adjustment of Contributions

2. Disregarding Part or All of the Terms of a CCA

E. CCA Entry, Withdrawal, or Termination

1. Entry

2. Withdrawal

3. Termination

F. Recommendations for Structuring and Documenting CCAs

Working Papers

Table of Worksheets

Worksheet 1 Statement by John Neighbour, Head of OECD Transfer Pricing Unit, on October 1999 Publication of Annex to 1995 Transfer Pricing Guidelines

Worksheet 2 "OECD Guidelines Not Keeping Pace with Increasing Globalization, Commenters Say," 12 Tax Mgmt. Transfer Pricing Rpt. 907 (2/18/04)

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