Meaning
International transfer pricing standard outlines the arm’s length principle for adjusting tax liabilities of associated enterprises. Bilateral double taxation treaties utilize the oecd model article 9 to address profit shifting between related entities. This provision permits tax authorities to adjust profits to reflect market transactions.
Transfer Principle
Controlled transactions must be compared to transactions between independent enterprises under similar economic conditions. To evaluate whether conditions are arm’s length, tax auditors apply the principles found in the oecd model article 9. This analysis involves comparing transaction prices and profit margins.
If transactions are not aligned with market rates, the host country will adjust the taxable profits of the local entity.
Economic Adjustment
Double taxation occurs when one state increases the profits of an entity without a corresponding reduction in the other state. Under the second paragraph of the oecd model article 9, the treaty partner should make an appropriate adjustment to avoid double taxation. This relief protects the corporate group from being taxed twice on the same income.
It maintains tax neutrality in cross-border trade.
Jurisdictional Boundary
Treaty provisions do not automatically override domestic anti-avoidance legislation. The application of the oecd model article 9 is limited to transactions between associated enterprises where common control or ownership exists.
