The Organisation for Economic Co-operation and Development (OECD) recently released Transfer Pricing (TP) Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises.
The “arm’s-length principle” of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related.
In the globalised economy, developing countries are opening their borders to trade and investment, exposing them to the risk of tax base erosion and profit shifting (BEPS).
Developing countries say they require fully effective transfer pricing regimes in place to deal with risks arising from Base Erosion and Profit Shifting (BEPS), which denies them essential tax revenue.
In today’s economy where multinational enterprises (MNEs) play an increasingly prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction.
The 2017 edition of the Transfer Pricing Guidelines mainly reflects a consolidation of the changes resulting from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
It also ensures that the tax base reported by MNEs in their country reflects the economic activity undertaken therein and taxpayers need clear guidance on the proper application of the arm’s length principle.
Countries are currently making major progress towards the goal of creating a fairer and more effective international tax system, including increasing efforts to close down loopholes, improve transparency and ensure that multinational enterprises pay tax where they carry out their activities, according to a new OECD report.
Recall that the latest report from OECD Secretary-General Angel Gurría to G20 Leaders describes the continuing fight against tax avoidance and tax evasion as one of the major success stories of the G20, founded on enhanced international co-operation. The report, released today, updates progress in key areas of OECD-G20 tax work, including movement towards automatic exchange of information between tax authorities and implementation of key measures to address tax avoidance by multinationals.
“Tax issues have been a key priority of the G20 since its inception, and 2017 is the year of implementation,” Mr Gurría said. “In the midst of the backlash against globalisation, we need to deliver on an agenda of inclusive growth. The work of the G20 and the OECD to repair and improve the international tax system so everyone pays their fair share remains one of the most important responses to these challenges, as well as one which is having a concrete impact.”
The 2017 edition of the OECD Transfer Pricing Guidelines incorporates the substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 Base erosion and profit shifting (BEPS) Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. It also includes the revised guidance on safe harbours approved in 2013 which recognises that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.
Iheanyi Nwachukwu
