INTM431040 - What is transfer pricing all about?: Why is the Associated Enterprises Article (OECD Model Treaty Article 9) important?
As far as transfer pricing is concerned, the general application of the arm's length principle is articulated in the Associated Enterprises Article of the OECD Model Tax Convention on Income and on Capital. Article 9.1 states that:
Where
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- an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
- the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
The existence of a tax treaty is not a prerequisite for transfer pricing rules to apply; indeed they are not necessary in the context of transactions involving affiliates in tax havens (with whom the UK tends not to have treaties). However, treaties will invariably contain an Associated Enterprises Article based on Article 9.1 of the OECD Model.
Article 9.2 of the OECD Model provides for a corresponding downwards adjustment to profits to be made in a counterparty's jurisdiction where an upwards adjustment has been made under Article 9.1. This seeks to eliminate the double taxation that would otherwise arise. However not all tax treaties contain a provision based on Article 9.2 of the OECD Model and in these cases double taxation is generally eliminated by other means - typically the Mutual Agreement Procedure (‘MAP’) provided for by OECD Model Article 25.
The OECD Transfer Pricing Guidelines explain how to choose and apply the most appropriate transfer pricing methodology in any given case. The guidelines are discussed at INTM463000 onwards.
