Transfer pricing guidelines issued by the OECD.

• Author: Greenhill, Mitchell
• Position: Organization for Economic Cooperation and Development

On July 27, 1995, the Organization for Economic Cooperation and Development (OECD) released the final version of its transfer pricing guidelines. The guidelines are not law, and member countries are encouraged (but not required) to follow them. Nonetheless, most member countries do not have their own detailed transfer pricing regulations and prior OECD guidelines on transfer pricing have been followed by member countries.

Despite some differences, the guidelines are generally consistent with the Sec. 482 transfer pricing regulations. U.S. taxpayers that comply with the Sec. 482 regulations should not be exposed to a significant risk of double taxation in OECD member countries.

Best Method Rule

The guidelines emphasize the arm's-length principle and the use of transaction-based methods that rely on comparable uncontrolled transactions. The Sec. 482 regulations use the "best method rule," which requires the taxpayer to select the pricing method that, under the facts and circumstances, will provide the "most reliable measure" of an arm's-length result relative to the other potentially applicable methods. Although the OECD guidelines do not specifically refer to the "best method rule," they apply the same principle. Under the guidelines, the taxpayer must select the method that provides the "best estimate" of an arm's-length price.

Comparability

Similar to the Sec. 482 regulations, the guidelines provide standards of comparability that emphasize functions performed, risks assumed and assets employed. Both the Sec. 482 regulations and the guidelines permit the use of inexact comparables "similar" to the controlled transaction under review. The types of risks that must be taken into account under both sets of rules include market risks; risks of loss associated with the investment in--and use of--property, plant and equipment; risks associated with the success or failure of research and developmental activities; and financial risks such as those caused by currency exchange rate and interest rate variability.

Arm's-Length Range

Similar to the Sec. 482 regulations, the guidelines provide that no adjustment should be made to a taxpayer's transfer pricing results if those results are within an arm's-length range derived from the use of two or more comparable uncontrolled transactions or more than one pricing method. However, if the taxpayer's transfer pricing results are outside the arm's-length range, those results may be adjusted to any point...