Meaning
Regulatory guideline refers to the internationally accepted rules developed by the organization for economic co-operation and development for pricing transactions between associated enterprises. Multinationals must comply with oecd transfer pricing guidelines to ensure that their cross border transactions are conducted at arm’s length. This framework prevents double taxation and limits the ability of corporate groups to shift profits to low tax jurisdictions.
Arm Length Principle
Transactions between related companies must be priced as if they were conducted between independent entities under similar conditions. The guidelines provide five distinct methods for determining whether transaction prices are arm’s length. The selection of the most appropriate method depends on the functions performed and the risks assumed by each party.
Documentation Requirement
Taxpayers must maintain three levels of documentation to demonstrate compliance to national revenue authorities. The master file offers a high level overview of the multinational group’s global business operations and transfer pricing policies. The local file provides detailed information on specific transactions of the local subsidiary, including financial comparisons and economic analyses.
Finally, country by country reporting forces the group to disclose its global allocation of income and taxes paid in each jurisdiction where it operates.
Audit Defense
Tax administrations use this information to perform risk assessments and select cases for comprehensive audit. Having robust files reduces the likelihood of tax adjustments and costly legal challenges. This structured approach provides certainty to both taxpayers and governments.
