Not all transfer-pricing rules are created equal.

• Author: Nobre, Lionel Bonner

Historically, by adopting Sec. 482, the U.S. has prevented multinational companies' (MNCs') transfer-pricing (TP) attempts. This provision authorizes the IRS to allocate gross income, deductions and credits between related parties, to avoid eroding the U.S. tax base and clearly reflect the income earned by each taxpayer in each transaction. In this way, the U.S. follows the internationally accepted arm's-length principle, which aims to treat all transactions as if they were between unrelated parties, for economic and tax purposes. Unfortunately, Brazilian TP methods do not follow general internationally accepted guidelines, which can frustrate those doing business with that country.

U.S. Methods

Under Regs. Sec. 1.482-3(a), the most commonly accepted methods for obtaining an arm's-length price are the: (1) comparable uncontrolled price (CUP) method; (2) resale price (RP) method; (3) cost plus (CP) method; (4) comparable profits method; and (5) profit split (PS) method. These form the basis for the preparation and/or procurement of complex economic TP studies by U.S. MNCs, to establish global TP policies for U.S. tax purposes.

A TP study must be supported by contemporaneous documentation and updated on a periodic basis. In addition, through a binding agreement between the IRS and an MNC, called an Advanced Pricing Agreement (APA), the IRS ensures compliance and offers taxpayers some degree of certainty in planning their business activities, by applying a pre-determined agreed-on TP method to specific transactions between the MNC and related parties.

OECD Guidelines

Following in the U.S.'s footsteps, other countries, such as Canada, Germany, France, the U.K., Japan and Australia, have also created TP legislation affecting MNCs, to protect against the erosion of their respective tax bases. The TP rules adopted by these countries generally follow the Organization for Economic Cooperation and Development's (OECD's) 1979 guidelines. The U.S. is one of the major OECD countries; even though Sec. 482 differs from the OECD's guidelines, it follows the guidelines' arm's-length principles.

The OECD guidelines were also closely followed by non-OECD countries, such as Argentina, Colombia, Ecuador, India, South Africa and Venezuela, in implementing their TP rules. These countries have strictly followed OECD guidelines and methods, by including the CUR, RP, CP and PS methods and/or similar calculation methods and APA-like procedures in their regulations.

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