Transfer pricing is the price that the related entities under common ownership decide upon for the internal exchange of goods, intangibles, resources or services. The term 'transfer pricing' is generally used in relation to multinational enterprises (MNEs) with multiple subsidiaries or divisions that can transfer tangible or intangible assets internally.
MNEs need to be sure that they are complying with international regulations on transfer pricing, such as the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) initiative.
The arm's length principle In order for MNEs to comply with international regulations and standards like the OECD BEPS, they need to meet the arm's length principle when it comes to transfer pricing. The arm's length principle is the condition that the price charged for a transaction between two related parties (e.g. Texaco and Chevron Australia Pty Ltd) must be equal to what it would have been should the transaction have occurred on the open market between two independent, unrelated parties. The arm's length principle ensures that an MNE's tax obligations cannot be lessened or avoided through strategic internal trading. With the rise of globalization, the implementation of the arm's length principle to stop unjust transfer pricing practices is being recognized as essential by economists, politicians and the business community alike.
DEMPE The concept of the development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) was introduced in the final Actions 8-10 report of the Transfer Pricing Aspects of Intangibles on October 5th 2015. It means that any parties within an MNE group that contribute to the value of intangibles by performing DEMPE functions, using assets or assuming risks should be fairly compensated. DEMPE is now an essential component of transfer pricing.
Transfer Pricing Methods There are several methods that multinational enterprises (MNEs) and tax administrations can use to determine accurate arm's length transfer pricing for transactions between associated enterprises. The Organisation for Economic Co-operation and Development (OECD) outlines five main transfer pricing methods that MNEs and tax administrations can use. We explore the five methods, giving examples for each, to help organizations decide which is most appropriate for their needs.
Adan's premier-quality databases enable organizations to access the latest comparable agreements and other comparables data so that they can apply transfer methods accurately and efficiently.
These are the five transfer pricing methods, and the ones favored by the OECD. The option that an organization chooses to use depends on the particular situation. It should take into account the amount of relevant comparables data that is available, the level of comparability of the uncontrolled and controlled transactions in question, and whether a method is appropriate for the nature of a particular transaction (determined through a functional analysis). The OECD states that it is not necessary to use more than one transfer pricing method when determining the arm's length price for a particular transaction.
Our databases allow organizations to find high-quality comparables data to apply transfer pricing methods outlined above. Our data is fully compliant with the OECD's guidelines and is assessed against more than 50 comparability factors. Our databases contain the most recent agreements for determining arm's length pricing for controlled transactions.
We can prepare a full OECD-compliant transfer pricing documentation package for licensing transactions, which you can use for transfer pricing compliance and reporting. Our transfer pricing documentation includes an industry analysis, group and company analysis, description of the transaction, functional analysis, selection of method, Benchmarking Study and financial analysis.
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