The second edition of the United Nations Practical Manual on Transfer Pricing for Developing Countries (TP Manual) was published on the 7th of April 2017. The TP Manual now includes, in response to comments and requests: (i) a new chapter on intra-group services; (ii) a new chapter on cost contribution arrangements; (iii) a new chapter on the treatment of intangibles; (iv) significant updating of other chapters; and (iv) an index to make the contents more easily accessible (to be included in the hard copy). The revised TP Manual also takes into consideration the outputs of the G20/OECD BEPS Project, including providing revised guidance on documentation, comparability analysis, and bringing in an additional section on commodity transactions in the Methods chapter (also known as “the sixth method” – drawn from developing country practice) ... Read more

B.6. COST CONTRIBUTION ARRANGEMENTS   B .6 .1 .       Introduction B.6.1.1.                         This chapter provides guidance on the use of cost contribution arrangements (CCAs) and the application of the arm’s length principle to CCAs for transfer pricing purposes. CCAs are contractual agreements between associated enterprises in an MNE group in which the participants share certain costs and risks in return for having a proportionate interest in the expected outcomes arising from the CCA. CCAs may also include independent parties. CCAs may be used for a broad range of purposes such as acquiring or creating tangible assets, acquiring or creating intangibles, and providing intra-group services. In relation to intangibles, the CCA will set out the interest of each participant in the intangibles to be developed. For services, the CCA will set out the services that each participant is entitled to receive. For CCAs involving tangible assets, the CCA ... Read more

D .4 . MEXICO COUNTRY PRACTICES   D .4 .1 .       Introduction D.4.1.1.              Mexico introduced transfer pricing rules in 1997 by including the arm’s length principle in the Mexican Income Tax Law (MITL). Since fiscal year 2014 the transfer pricing rules are found in Articles 76-IX, 76-X, 76-XII, 179, 180; 181 and 182. The Transfer Pricing Guidelines for Multinational Companies and Tax Administrations as approved by the Council of the OECD are referred to as applica ble in the MITL, for interpretation of the provisions in transfer pricing matters. D.4.1.2.              Tax audits in Mexico may be conducted through on-site inspection of taxpayers to review their accounting, goods and merchandise, or through desk reviews, in which the tax authorities may require that taxpayers submit their accounting records, data and other required documents and information at the offices of the tax authorities. In practice, most audits are conducted ... Read more

D.5. SOUTH AFRICA—COUNTRY PERSPECTIVE  D.5.1.  Introduction D.5.1.1.    Transfer pricing has been and still is a strategic focus area for the South African Revenue Service (SARS) over the last few years, forming an integral part of SARS’s Compliance Programme. International developments around the transfer pricing practices of large multinationals that have been made public, together with the G20/OECD BEPS Project, have resulted in transfer pricing having a heightened focus not only for SARS and South Africa’s National Treasury but also at the highest levels of government. Labour unrest in the extractive sector saw NGOs and civil society, together with some political parties, attributing the inability of corporates to pay higher wages to be the direct result of transfer mispricing and profit shifting. D.5.2.  South African Transfer Pricing Law D.5.2.1.  South Africa’s transfer pricing legislation is set out in section 31 of Income Tax Act, 1962, and ... Read more

D .3. TRANSFER PRICING PRACTICES AND CHALLENGES IN INDIA   D .3 .1 .       Introduction D.3.1.1.              Transfer pricing provisions were introduced in the Indian Income-tax Act in 2001. The provisions were broadly aligned with the OECD guidelines on transfer pricing. Over the last 15 years, transfer pricing audits in India have thrown up a number of issues and challenges. Administration of the transfer pricing law has also resulted in a number of disputes and protracted litigation. With a view to reducing transfer pricing disputes, a number of initiatives have been introduced by the tax administration in the recent past. Some of the initiatives have included the introduction of an Advance Pricing Agreement (APA) Scheme, inclusion of Safe Harbour provisions, utilization of the MAP provision in bilateral tax treaties to resolve TP disputes, migration from a quantum of transaction based selection to risk-based selection of TP cases ... Read more

D.2. CHINA COUNTRY PRACTICE   D .2 .1 .       Introduction D.2.1.1.              On 5 October 2015, the Organisation for Economic Co-operation and Development (OECD) published 15 final reports and an explanatory statement on the Base Erosion and Profit Shifting (BEPS) project. After an intensive two-year process, the international tax reform mandated by the G20 leaders and coordinated by the OECD has finally come to fruition. The post-BEPS era focusing on the implementation of the BEPS outcomes has been ushered in. A distinguishing factor that made this reform different from the previous ones is the involvement of many developing countries in both the early stage when the various measures were developed and the later implementation phase. The voice of developing countries has started to be heard by the global community when formulating international tax policy. This unprecedented event has provided developing countries with an opportunity to begin at ... Read more

D.1. BRAZIL COUNTRY PRACTICES   D .1 .1 .       Introduction: General Explanation D.1.1.1.              Brazil introduced a law on transfer pricing, through Law n. 9430/1996, in 1996.137 The bill was proposed to deal with tax evasion through transfer pricing schemes, and in line with this proposal it adopted the arm´s length principle. D.1.1.2.              The methodology introduced by the law listed the traditional transaction methods (Cost Plus Method and Resale Price Method) but denied the use of transactional profit methods (the Profit Split Method and Transactional Net Margin Method) and formulary apportionment. Regarding the CUP Method, for exports or imports, the law introduced a methodology that is similar to OECD practices; and in addition Brazil also adopted the so called Sixth Method (which is the CUP method applied specifically for commodities). However, with regard to the Cost Plus Method and Resale Price Method, instead of making use of ... Read more

C.5. ESTABLISHING TRANSFER PRICING CAPABILITY IN DEVELOPING COUNTRIES   C .5 .1 .       Introduction C.5.1.1.                         This Chapter addresses issues of setting up a dedicated transfer pricing unit in the tax administration. There are important opportunities as well as challenges in setting up such a unit for the first time. The design of such a unit, its vision and mission statements and the measurement of whether it has been successful will have to take into account factors widely recognized to be key features of modern tax administrations. These include factors such as: Ø the relationship between tax policy and tax administration; Ø the need to evaluate current capabilities and gaps to be filled; Ø the need for a clear vision, a mission and a culture that reflects them; Ø organizational structure; Ø approaches taken to building team capability; Ø the need for effective and efficient business processes; ... Read more

C.4. DISPUTE AVOIDANCE AND RESOLUTION   C .4 .1 .       Introduction C.4.1.1.                         Dispute avoidance and resolution procedures are essential to the effective and efficient functioning of all tax administrations. Such procedures, if properly designed and implemented, can enable fair and expeditious resolution of differences between tax administrations and taxpayers regarding interpretation and application of the relevant tax laws. They can help reduce the uncertainty, expense and delay associated with a general resort to litigation on tax matters or a failure to provide any recourse. They can also avoid integrity issues that might sometimes arise in case of an over-reliance on ad hoc (case by case) settlements. For the reasons mentioned above dispute avoidance and resolution procedures are of critical importance to taxpayers and access to effective procedures is therefore a key consideration for taxpayers. C.4.1.2.                         The goal of dispute avoidance and resolution procedures is to facilitate ... Read more

C.3. AUDITS AND RISK ASSESSMENT   C .3 .1 .       Introduction to Audits and Risk Assessment C.3.1.1.          As discussed in Chapter B.1, the establishment of an appropriate “arm’s length” result is not an exact science and requires judgment, based on sound knowledge, experience and skill. Owing to the complexities inherent in transfer pricing, a transfer pricing enquiry is usually complicated and can become a costly exercise both for a national tax authority and a taxpayer. It should therefore not be undertaken lightly; due consideration should be given to the possible complexities and to the amount of tax at risk. C.3.1.2.          The outcome of an effective audit process has two aspects: Ø increased future compliance (which indirectly contributes to future tax revenue and protection of the tax base); and Ø increased current tax revenues (where cases are successfully audited). C.3.1.3.          Transfer pricing audits are generally time and ... Read more

C.2. DOCUMENTATION   C .2 .1 .       Introduction C.2.1.1.      Adequate transfer pricing documentation can serve several useful functions. Quality transfer pricing documentation will: (i)   ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices for transactions between associated enterprises; (ii) provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and (iii) provide tax administrations with useful information to use in evaluating a taxpayer’s transfer pricing positions upon audit, thereby contributing to the avoidance of many disputes and to the timely resolution of any transfer pricing disputes that may arise. C.2.1.2.      In the period from 2013 to 2015, the OECD/G20 BEPS Project has included an effort to create a more consistent and useful documentation standard for use by countries. Insofar as possible, countries should conform their transfer pricing documentation requirements to established international standards in order to limit ... Read more

C.1. ESTABLISHING AND UPDATING TRANSFER PRICING REGIMES   C .1 .1 .       Introduction C.1.1.1.     Overview of Part C C.1.1.1.1.            Part C of this Manual addresses the practical implementation of transfer pricing rules in a particular jurisdiction guided by the legislative design considerations outlined in Chapter B.8. This Chapter, C.1., provides guidance on Ø How the considerations and the substantive issues raised in Part B can be implemented in a national transfer pricing regime through laws and subsidiary regulations; Ø How national transfer pricing regimes relate to domestic tax laws; Ø The position of transfer pricing rules within the overall framework of international tax rules within that domestic regime; and Ø How to keep the newly implemented transfer pricing regime updated, and administer it on a daily basis. C.1.1.1.2.            The Chapters that follow in Part C then deal in depth with specific areas of implementation and administration ... Read more

B.8. GENERAL LEGAL ENVIRONMENT   B .8 .1 .       Introduction B.8.1.1.              Transfer pricing rules were introduced in domestic legislation by the United Kingdom in 1915 and by the United States in 1917. Transfer pricing was not an issue of great concern, however, until the late 1960s when international commercial transactions expanded greatly in volume. The development of transfer pricing legislation was historically led by developed countries; in recent years, however, with the growth and complexity of international “transfers” within MNEs, both developed and developing countries are introducing legislation to address transfer pricing issues. See Chapter B.1., para. B.1.3. for more on the evolution of transfer pricing rules. B.8.1.2.              Domestic transfer pricing legislation worldwide shows some harmonisation in basic principles, in accordance with the arm’s length standard, even if the application is not identical across jurisdictions. The introduction of transfer pricing rules has taken place within different ... Read more

B.7. TRANSFER PRICING ASPECTS OF BUSINESS RESTRUCTURINGS   B .7 .1 .       Setting the framework and definition issues General B.7.1.1.                   In recent years the tax aspects of business restructurings undertaken by multinational enterprises (MNEs) have attracted much attention from tax authorities all around the globe. From a transfer pricing standpoint such reorganizations require consideration of how to apply the arm´s length principle to a sound cross-border redeployment of functions, assets and risks within the same group. B.7.1.2.                   There is no legal or universally accepted definition of “business restructurings”. In a transfer pricing scenario these transactions are defined as the cross-border redeployment of functions, assets (tangible and/or intangible) and risks to which a profit/loss potential may be attached. In this respect business restructurings undertaken by MNEs need not be confused with the ordinary acquisition of a business or an ongoing concern. However, it may be common to ... Read more

B.5. TRANSFER PRICING CONSIDERATIONS FOR INTANGIBLE PROPERTY   B .5 .1 .       Introduction B.5.1.1.              Intangibles affect nearly every aspect of economic activity in the twenty-first century. Intangibles have become a major source of sustainable competitive advantage for many firms. The importance of intangibles in the economy has been growing for decades in a number of sectors. The information and communication technology (ICT) revolution has made some technologies cheaper and more powerful, enabling improvement of business processes and boosting innovation across virtually all sectors of the economy. This technological evolution has made intangibles increasingly important profit drivers in many individual businesses. It is therefore necessary to give careful consideration to intangibles when conducting a transfer pricing analysis. B.5.1.2.              Transfer pricing issues can arise when MNEs develop, acquire, exploit or transfer intangibles. Various entities within an MNE group may participate in intangibles development through functions like research, development ... Read more

B.4. INTRA-GROUP SERVICES   B .4 .1 .       Introduction B.4.1.1.              This chapter considers the transfer prices for intra-group services within an MNE group. Firstly, it considers the tests for determining whether chargeable services have been provided by one or more members of an MNE group to one or more associated enterprises for transfer pricing purposes. Secondly, if chargeable intra-group services have been provided, it considers the methods for determining arm’s length consideration for the services. The chapter also considers the circumstances in which tax authorities may provide taxpayers with the option of using a safe harbour for low value-adding services or for minor expenses. B.4.1.2.              Under the arm’s length principle, if a chargeable intra-group service has been provided to associated enterprises, arm’s length transfer prices should be charged to group members receiving or expected to receive an economic benefit from the services. The term “associated enterprises” ... Read more

B.3. METHODS B .3 .1 .       Introduction to Transfer Pricing Methods B.3.1.1.                         This part of the chapter describes several transfer pricing methods that can be used to determine an arm’s length price and describes how to apply these methods in practice. Transfer pricing methods (or “methodologies”) are used to calculate or test the arm’s length nature of prices or profits. Transfer pricing methods are ways of establishing arm’s length prices or profits from transactions between associated enterprises. The transaction between related enterprises for which an arm’s length price is to be established is referred to as the “controlled transaction”. The application of transfer pricing methods helps assure that transactions conform to the arm’s length standard. It is important to note that although the term “profit margin” is used, companies may also have legitimate reasons to report losses at arm’s length. Furthermore, transfer pricing methods are not ... Read more

B.2. COMPARABILITY ANALYSIS  B .2 .1 .       Rationale for Comparability Analysis B.2.1.1.              The term “comparability analysis” is used to designate two distinct but related analytical steps: 1)     An understanding of The economically significant characteristics and circumstances of the controlled transaction, i.e. the transaction between associated enterprises, and The respective roles and responsibilities of the parties to the controlled transaction. This is generally performed through an examination of five “comparability factors”, see further para. B.2.1.6. 2)     A comparison between the conditions of the controlled transaction (as established in step 1 immediately above) and those in uncontrolled transactions (i.e. transactions between independent enterprises) taking place in comparable circumstances. The latter are often referred to as “comparable uncontrolled transactions” or “comparables”. B.2.1.2.              This concept of comparability analysis is used in the selection of the most appropriate transfer pricing method, as well as in applying the selected method to arrive ... Read more

B.1. INTRODUCTION TO TRANSFER PRICING   B .1 .1 . What is Transfer Pricing? B.1.1.1.              This introductory chapter gives a brief outline of the subject of transfer pricing and addresses the practical issues and concerns surrounding it, especially the issues faced and approaches taken by developing countries. These are then dealt with in greater detail in later chapters. B.1.1.2.              Rapid advances in technology, transportation and communication have given rise to a large number of multinational enterprises (MNEs) which have the flexibility to place their enterprises and activities anywhere in the world, as outlined in Part A of this Manual. B.1.1.3.              A significant volume of global trade consists of international transfers of goods and services, capital (such as money) and intangibles (such as intellectual property) within an MNE group; such transfers are called “intra-group transactions”. There is evidence that intra-group trade has been growing steadily since the ... Read more

A.4. Managing the Transfer Pricing Function in a Multinational Enterprise A.4.1.           MNEs face challenges in managing their transfer pricing function. While transfer pricing may be used in some MNEs for management control, MNEs nevertheless are required to comply with the transfer pricing rules for tax purposes in the countries in which they operate. The determination of the transfer price affects the allocation of taxable income among the associated enterprises of an MNE group. A.4.2.           Entities in an MNE group conduct global business that gives rise to opportunities to optimize the value chain of goods or services and therefore look for synergies. A challenge facing an MNE conducting a global business with associated enterprises is whether the transfer pricing method used for internal transactions is acceptable to the tax authorities in the countries in which the MNE operates. The transfer pricing challenge becomes even greater when the ... Read more

A.3. Legal Structure   A.3.1.       General Principles of Company Law A.3.1.1.              The legal systems used by countries include the common law and civil law systems. The common law system originates in the UK and is used in countries such as Australia, Canada, India, Malaysia, New Zealand and the USA. The common law is based on judgments in court cases. A judgment of a superior court is binding on lower courts in future cases. The civil law system has its origins in Roman law and operates in Europe, South America and Japan. Under a civil law system, law is enacted and codified by parliament. Companies are recognized under both systems as artificial legal persons with perpetual life and limited liability. The domestic law treatment of a partnership varies in common law and civil law countries. A.3.1.2.              Most countries treat partnerships as fiscally transparent entities with flow-through treatment ... Read more

A.2. Theory of the Firm and Development of Multinational Enterprises A.2.1.                 In economic theory, firms are organizations that arrange the production of goods and the provision of services. The aim of a firm is to produce goods and provide services to maximize profits. In the absence of MNEs, production would be carried out through a series of arm’s length transactions between independent parties.7 These transactions would require contracts between the independent producers but a significant part of these resources would be used in the process of making contracts. A.2.2.                 The expenses of making contracts are called “transaction costs” since expenses are incurred by individuals in finding other persons with whom to contract, as well as in negotiating and finalizing the contracts. As contracts cannot cover every possible issue that may arise between the contracting parties, there is a risk of disputes being created by unforeseen contingencies ... Read more

A.1. INTRODUCTION A.1.1.                 This chapter provides background material on Multinational Enterprises (MNEs); MNEs are a key aspect of globalization as they have integrated cross-border business operations. The chapter describes the factors that gave rise to MNEs and shows how an MNE is able to exploit integration opportunities in the cross-border production of goods and provision of services through a value chain (or value-added chain). A.1.2.                 MNEs are groups of companies and generally operate worldwide through locally incorporated subsidiaries or permanent establishments; they may also use other structures such as joint ventures and partnerships. At the operational level, an MNE’s business operations may be organized in several different ways such as a functional structure, a divisional structure or a matrix structure. This chapter outlines the legal structures that may be used by MNEs, and considers the differences between them. A.1.3.                 This chapter then uses a “value chain ... Read more