INTM463010 - Transfer Pricing: OECD and methodologies: Overview

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations set out various methods for establishing the arm's length price. Of necessity the Guidelines are written in very broad terms.

The methods considered within the OECD Transfer Pricing Guidelines for reaching the arm's length price are divided into traditional methods and other (profit) methods. The paragraphs on each method contain guidance on how to arrive at the arm's length price. The overarching premise is that, for the purpose of establishing profits for tax purposes, the price between connected parties should be the same as would have been charged between unconnected parties.

The OECD Transfer Pricing Guidelines say that transfer pricing is not an exact science but requires the exercise of judgement on the part of both the tax administration and taxpayer. This guidance endorses that approach in dealing with transfer pricing enquiries.

The comments in this chapter are not intended to be a substitute for the OECD Transfer Pricing Guidelines. Comments here provide an introduction, written in the light of practical experience, to the transfer pricing methodologies set out in the Guidelines. You should always refer to the Guidelines for further detail. Cross-references to the relevant section of the Guidelines appear throughout this chapter.

Note: Except where otherwise stated, references in these instructions to paragraphs within the OECD Transfer Pricing Guidelines are to the 2010 version with the equivalent 1995 paragraph (where applicable) given in brackets following.