GTC Glossary

(see: Transfer Pricing Adjustment).

An adjustment made by the tax authorities to the profits of an enterprise after determining that the transfer price of a transaction with a related party does not conform to the arm’s length principle. (UN Manual on Transfer Pricing 2021)

An arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparable and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. An advance pricing arrangement may be unilateral involving one tax administration and a taxpayer or multilateral involving the agreement of two or more tax administrations. (OECD, TP Guidelines 2022).

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An APA is an arrangement in respect of certain specified transactions that determines in advance the appropriate criteria for determining transfer pricing. The agreement may be made by the taxpayer unilaterally with the tax administration or may be a bilateral or multilateral agreement involving the tax administrations of other countries. (UN Manual on Transfer Pricing 2021)

A letter ruling, which is a written statement, issued to a taxpayer by tax authorities, that interprets and applies the tax law to a specific set of facts. (OECD's Glossary of Tax Terms)

Alternative Dispute Resolution refers to a set of practices and techniques aimed at permitting the resolution of legal disputes outside the court. (UN, UNCITRAL, Alternative Dispute Resolution)

Affiliated parties are entities linked by a common interest normally defined in terms of a certain level of shareholding or another criterion. (UN Manual on Transfer Pricing 2021)

An allocation key is used to allocate costs of a service provider among other related entities for the purposes of computing the arm’s length fee under the cost plus method using an indirect charge approach. The allocation key may be a quantity such as turnover, employee numbers, working hours or floor space. (UN Manual on Transfer Pricing 2021)

Term used for the determination of a dispute by the judgment of one or more persons, called arbitrators, who are chosen by the parties and who normally do not belong to a normal court of competent jurisdiction.

Internationally, the Commercial Arbitration is the most used ADR Tool, regulated by the UNCITRAL Model Law on International Commercial Arbitration.

Arbitration provisions in tax treaties, is present in article 25(5) of the OECD Model (OECD Model, 2008) and art. 25 of the UN Model (UN Model, 2011).

EU Arbitration Directive (2017/1852) has included the ADR procedure, as an ADR mechanism, which is binding.

The international standard that OECD member countries have agreed should be used for determining transfer prices for tax purposes. It is set forth in Article 9 of the OECD Model Tax Convention as follows: where “conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”. (OECD, TP Guidelines 2022).

The ALP is an international standard that compares the transfer pricing charged between related entities with the price of similar transactions carried out between independent entities at arm’s length. An adjustment may be made to the extent that profits of a related party differ from those that would be agreed between independent entities in similar circumstances. (UN Manual on Transfer Pricing 2021)

A range of figures that are acceptable for establishing whether the conditions of a controlled transaction are arm’s length and that are derived either from applying the same transfer pricing method to multiple comparable data or from applying different transfer pricing methods. (UN Manual on Transfer Pricing 2021)

The arm’s length range is a range of values from which an arm’s length price may be selected, arrived at by applying an appropriate transfer pricing method. (OECD, TP Guidelines 2022)

The allocation of income and expenses between related entities or between branches of a single legal entity with the aim of reducing the total tax payable by the group. (UN Manual on Transfer Pricing 2021)

A business may assemble a uniquely qualified or experienced group of employees and this could affect the arm’s length price for services provided or the efficiency with which goods or services are provided by the business. This should ordinarily be taken into account in the comparability analysis. The existence of an assembled workforce may also need be taken into account in pricing business restructurings or similar transactions. (UN Manual on Transfer Pricing 2021)

Two enterprises are associated enterprises with respect to each other if one of the enterprises meets the conditions of Article 9, sub-paragraphs 1a) or 1b) of the OECD Model Tax Convention with respect to the other enterprise. (OECD, TP Guidelines 2022).

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Associated enterprises are enterprises under common control. This will generally be the case where the same persons participate directly or indirectly in the management, control or capital of both enterprises. (UN Manual on Transfer Pricing 2021)

Examination and verification carried out by an outside agency (such as an accountancy firm or the tax authorities) of a taxpayer’s books and accountants and/or the general accuracy of returns and declarations, either as a routine operation, or where evasion is suspected (OECD's Glossary of Tax Terms)

Term used for the determination of a dispute by the judgment of one or more persons, called arbitrators, who are chosen by the parties and who normally do not belong to a normal court of competent jurisdiction. (OECD's Glossary of Tax Terms)

When a transfer price is found to be outside the arm’s length range the transfer pricing rules of some countries require the price to be adjusted to the average value (usually the median) of the range. (UN Manual on Transfer Pricing 2021)

A term that is difficult to define but which is generally used to describe the arrangement of a taxpayer's affairs that is intended to reduce his tax liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow. Cf. evasion (OECD's Glossary of Tax Terms)

The BALRM assigns an estimated arm’s length rate of return to the sale, licensing or transfer of intangible property. The method was proposed in a White Paper in the US in 1988 but has not been adopted in the US transfer pricing legislation. Some aspects of the method are however present in the comparable profits method. The method focuses on the returns realized on the assets or costs used in performing each function by a related party, and examines the return of uncontrolled entities performing the same functions at arm’s length. (UN Manual on Transfer Pricing 2021)

Bilateral Advance Pricing Arrangement (see: APA) (OECD's Glossary of Tax Terms)

A payment, normally from one or more participants to another, to adjust participants’ proportionate shares of contributions, that increases the value of the contributions of the payer and decreases the value of the contributions of the payee by the amount of the payment. (OECD, TP Guidelines 2022).

Benchmarking in transfer pricing refers to the process of comparing the conditions of the related party transaction, referred to as the controlled transaction, with the conditions that apply to similar transactions carried out by independent unrelated parties in similar circumstances, referred to as uncontrolled transactions. Generally benchmarking involves a search in databases of company information to extract relevant uncontrolled transactions for comparison and analysis. (UN Manual on Transfer Pricing 2021)

In considering whether a company may be allowed to deduct, as an expense, payments made to a related company in a multinational group on account of expenses incurred by that related company in providing intra-group services, tax authorities would refuse a deduction unless a real benefit had been conferred on the company claiming the deduction. (OECD's Glossary of Tax Terms)

In considering the arm’s length return for intragroup services the benefit to the recipient of the services, if any, should be taken into consideration. If no benefit is received by the recipient of the services this would indicate that no remuneration should be paid for the services. (UN Manual on Transfer Pricing 2021)

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment. (OECD/G20 Inclusive Framework on BEPS)

The ratio of gross income to operating costs, sometimes used to establish the arm’s length price using the transactional net margin method. (UN Manual on Transfer Pricing 2021)

A rule requiring the taxpayer to use the transfer pricing method that results in the most reliable measure of the arm’s length price in the circumstances. The rule does not give priority to the same transfer pricing methods in all circumstances. (UN Manual on Transfer Pricing 2021)

Involving two or more tax authorities (OECD Report on Profit Attribution to PE,2010)

Obligation to persuade a court or other entity of the validity of a factual assertion. (OECD’s Glossary of Tax Term)

The cross-border redeployment of functions, assets and risks by a multinational entity. (UN Manual on Transfer Pricing 2021)

Test used as a weapon against tax avoidance schemes. Artificial schemes which create circumstances under which no tax or minimal tax is levied may be disregarded if they do not serve a "business purpose". (OECD’s Glossary of Tax Terms)

A payment made by a new entrant to an already active CCA for obtaining an interest in any results of prior CCA activity. (OECD, TP Guidelines 2022).

Compensation that a participant who withdraws from an already active CCA may receive from the remaining participants for an effective transfer of its interests in the results of past CCA activities. (OECD, TP Guidelines 2022).

Committee on Fiscal Affairs, (CFA) is a leader in setting standards and guidelines in respect of international taxation matters. It is responsible for work on the OECD Model Tax Convention on Income and on Capital, the OECD Transfer Pricing Guidelines and the OECD Manual on Exchange of Information among others. (OECD, CFA)

Services performed by a headquarters or group service company on behalf of a number of entities in the group. Typical centralized services include accounting, legal, pensions, payroll or tax. (UN Manual on Transfer Pricing 2021)

See “sixth method”.

Adjustments made to improve the accuracy and reliability of the comparables to ensure that the financial results of the comparables are stated on the same basis as those of the tested party. (UN Manual on Transfer Pricing 2021)

A comparison of a controlled transaction with an uncontrolled transaction or transactions. Controlled and uncontrolled transactions are comparable if none of the differences between the transactions could materially affect the factor being examined in the methodology (e.g. price or margin), or if reasonably accurate adjustments can be made to eliminate the material effects of any such differences. (OECD, TP Guidelines 2022).

Factors taken into account in determining the level of comparability of the controlled and comparable transactions. These are attributes of the transactions or parties that could materially affect prices or profits, including: the characteristics of the property or services; functional analysis; contractual terms; economic circumstances; and business strategies pursued.

Controlled and uncontrolled transactions are comparable if either none of the differences between them could materially affect the arm’s length price or profit or, where such material differences exist, reasonably accurate adjustments can be made to eliminate their effect. A comparable transaction to which such comparability adjustments can be made is a comparable adjustable transaction. (UN Manual on Transfer Pricing 2021)

These may be internal comparables, i.e. transactions between the tested party and independent parties, or external comparables, i.e. transactions between two independent entities that are not a party to the controlled transaction. (UN Manual on Transfer Pricing 2021)

Under the US transfer pricing regulations, the Comparable Profits Method is a method to determine an arm’s length consideration for transfers of intangible property. If the reported operating income of the tested party is not within a certain range, an adjustment will be made. The method involves comparing the operating income that results from the consideration actually charged in a controlled transfer with the operating income of similar uncontrolled taxpayers. (UN Manual on Transfer Pricing 2021)

A comparable search involves the identification of potentially comparable transactions or companies. These may be internal comparables, i.e. transactions between the tested party and independent parties, or external comparables, i.e. transactions between two independent entities that are not a party to the controlled transaction. A search for external comparables involves consideration of the comparability factors; development of screening criteria; initial identification and screening; and secondary screening, verification and selection of comparable transactions. (UN Manual on Transfer Pricing 2021)

A comparable uncontrolled transaction is a transaction between two independent parties that is comparable to the controlled transaction under examination. It can be either a comparable transaction between one party to the controlled transaction and an independent party (“internal comparable”) or between two independent parties, neither of which is a party to the controlled transaction (“external comparable”). (OECD, TP Guidelines 2022).

A transaction between independent enterprises that is similar to the controlled transaction and takes place in similar circumstances. (UN Manual on Transfer Pricing 2021)

A transfer pricing method that compares the price for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. (OECD, TP Guidelines 2022).

A compensating adjustment is made by a taxpayer who reports an arm’s length transfer price for a controlled transaction even though this price differs from the amount actually charged between the associated enterprises. This adjustment would be made before the tax return is filed. (UN Manual on Transfer Pricing 2021)

An adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer’s opinion, an arm’s length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises. This adjustment would be made before the tax return is filed (OECD, TP Guidelines 2022).

Under a double tax treaty or other agreement the contracting states may each appoint a competent authority that is empowered to resolve disputes arising from the interpretation or application of the agreement. This mutual agreement procedure is provided for in the treaty or in another agreement such as the EU Arbitration Convention. (UN Manual on Transfer Pricing 2021)

An entity entitled to the benefit of a tax treaty in respect of income arising in a foreign country, in a situation where the economic benefit of that income accrues to persons in another country who would not have been entitled to the treaty benefits if they received the income directly rather than via the conduit company. (UN Manual on Transfer Pricing 2021)

In the context of transfer pricing, connected persons are associated enterprises to which transfer pricing laws and regulations may apply. Connected persons are defined in terms of the control of one person over the other or two persons under the control another person. (UN Manual on Transfer Pricing 2021)

(see: Transfer Pricing Adjustment).

An adjustment made by the tax authorities to the profits of an enterprise after determining that the transfer price of a transaction with a related party does not conform to the arm’s length principle. (UN Manual on Transfer Pricing 2021)

Where a contribution analysis is used under the profit split method, the relevant profit from the transactions is divided between the associated enterprises based on the relative value of their contributions, e.g. their functions performed, assets used or contributed and risks assumed. (UN Manual on Transfer Pricing 2021)

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An analysis used in the profit split method under which the relevant profits from controlled transactions are divided between the associated enterprises based upon the relative value of the contributions made by each of the associated enterprises participating in those transactions, supplemented where possible by external market data that indicate how independent enterprises would have divided profits in similar circumstances (OECD, TP Guidelines 2022).

Control is defined for the purpose of the UN Model Tax Convention as a situation where one enterprise participates directly or indirectly in the management, capital or control of another; or where the same persons participate directly or indirectly in the management, capital or control of both enterprises. (UN Manual on Transfer Pricing 2021)

A CFC is a corporation normally located in a low tax jurisdiction and controlled by shareholders resident in another country. CFC legislation normally combats the sheltering of income in such corporations in low tax jurisdictions by attributing a proportion of the income sheltered in the corporation to the shareholders in the country where they are resident. (UN Manual on Transfer Pricing 2021)

An analysis used in the profit split method under which the relevant profits from controlled transactions are divided between the associated enterprises based upon the relative value of the contributions made by each of the associated enterprises participating in those transactions, supplemented where possible by external market data that indicate how independent enterprises would have divided profits in similar circumstances. (OECD, TP Guidelines 2022).

Transactions between two enterprises that are associated enterprises with respect to each other. (OECD, TP Guidelines 2022).

Transactions between associated enterprises for the transfer of property or services. The term may also be used to denote a transaction between related enterprises which is the subject of a transfer pricing analysis (UN Manual on Transfer Pricing 2021)

An enterprise whose only purpose is to coordinate the activities of associated enterprises, to do research or to carry out support activities for those enterprises. (UN Manual on Transfer Pricing 2021)

See: corresponding adjustment (UN Manual on Transfer Pricing 2021)

An adjustment to the tax liability of the associated enterprise in a second tax jurisdiction made by the tax administration of that jurisdiction, corresponding to a primary adjustment made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent. (OECD, TP Guidelines 2022).

An adjustment made to the profits of an associated enterprise by the tax authority in a second jurisdiction, corresponding to a primary adjustment made by the tax authority in the first jurisdiction, so that the allocation of profits of the group by the two jurisdictions is consistent. (UN Manual on Transfer Pricing 2021)

A CCA is a contractual arrangement among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create benefits for the individual businesses of each of the participants. (OECD, TP Guidelines 2022).

A cost contribution arrangement (CCA) is an arrangement between enterprises to share the costs and risks of developing, producing or obtaining assets, services or rights. The arrangement sets out the responsibilities and risks of the participants and the nature and extent of the interest of each participant in the assets, services or rights resulting from the arrangement. (UN Manual on Transfer Pricing 2021)

A mark-up that is measured by reference to margins computed after the direct and indirect costs incurred by a supplier of property or services in a transaction. (OECD, TP Guidelines 2022).

A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus mark-up is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm’s length price of the original controlled transaction. (OECD, TP Guidelines 2022). 

This method evaluates the arm’s length nature of an intercompany charge for tangible property or services by reference to the gross profit mark-up on costs incurred by the supplier of the property or services. It compares the gross profit mark-up earned by the tested party with the gross profit markups earned by comparable companies. (UN Manual on Transfer Pricing 2021)

A CSA is the term used in the US to describe a cost contribution arrangement between enterprises to share the costs and risks of developing intangible assets. The arrangement would normally set out the contributions of the participants and define their share in the results of the assets resulting from the arrangement. (UN Manual on Transfer Pricing 2021)

The final BEPS report on Action 13 (2015) on transfer pricing documentation included a country-by-country (CbC) reporting requirement for multinational groups that meet a specified turnover threshold to provide aggregate information on an annual basis covering the jurisdictions in which they operate. This gives details of entities, income and taxes paid in each jurisdiction and indicators of economic activity and substance. (UN Manual on Transfer Pricing 2021)

Under the EU code of conduct on transfer pricing documentation taxpayers are recommended to keep documentation including a country-specific file. This should contain: a detailed description of the taxpayer’s business strategy; details of country-specific controlled transactions; a comparability analysis; selection and application of a transfer pricing method; and internal and external comparables etc. (UN Manual on Transfer Pricing 2021)

Analysis of transactions involving the use or transfer of intangible assets between associated enterprises requires identification of specific contributions made with respect to DAEMPE (development or acquisition, enhancement, maintenance, protection and exploitation) of the intangibles involved. Some or all of them might reflect important contributions to value that must be appropriately remunerated. (UN Manual on Transfer Pricing 2021)

In the process of undertaking a transfer pricing analysis, the first step always involves the accurate delineation of the transaction, including an awareness of the industry and market context in which the transaction takes place. (UN Manual on Transfer Pricing 2021)

A derivative instrument is a contractual right that derives its value from the value of something else, such as a debt security, equity, commodity or a specific index. The most common derivative instruments are forwards, futures, options and notional principal contracts such as swaps, caps, floors, collars and credit derivatives. Unlike traditional debt and equity securities, these instruments generally do not involve a return on an initial investment. (OECD Report on Profit Attribution to PE, 2010)

A method of charging directly for specific intra-group services on a clearly identified basis. (OECD, TP Guidelines 2022).

Costs that are incurred specifically for producing a product or rendering service, such as the cost of raw materials. (OECD, TP Guidelines 2022)

Dispute Prevention refers to the amicable settlement of disputes. A solution is found before the contentious phase (e.g. the case is brought to Court).

Tools internationally considered as dispute prevention are: mediation, ombudsman, consultation, conciliation. (UNCITRAL, Dispute prevention and alternative dispute settlement)

Documentation requirements relate to transfer pricing documentation that is required by the transfer pricing rules of a particular country. The required documentation may be listed in the law or regulations, or in some countries may not be specified in detail. (UN Manual on Transfer Pricing 2021)

Double Taxation Convention (DTC) are international agreements between two or more jurisdictions in order to mitigate the financial burden on the taxpayer. DTCs contain rules which allocate taxing rights. (M.Lang, Introduction to the Law of Double Taxation, 2021)

Duplication of services takes place when a service is provided to an associated enterprise which has already incurred costs for the same activity performed either by itself or on its behalf by an independent entity. Duplicated activities are usually not chargeable services although this must be decided on the facts and circumstances of each case. (UN Manual on Transfer Pricing 2021)

The equivalent of ownership for income tax purposes by a separate enterprise, with the attendant benefits and burdens (e.g. the right to the income attributable to the ownership of the asset, such as royalties; the right to depreciate a depreciable asset; and the potential exposure to gains or losses from the appreciation or depreciation of the asset). (OECD Report on Profit Attribution to PE,2010)

Arbitration is a form of dispute resolution in which the parties to a contract agree to have their dispute resolved by a third-party decision-maker, rather than through litigation, and agree that this third party's ruling will be binding on them.

In the context of European Union (EU) law, an action could be brought before the Court of Justice or the General Court based on an arbitration clause contained in a contract concluded by or on behalf of the EU, whether governed by public or private law, which expressly provides (by way of derogation from the rules of ordinary law under which disputes arising out of such contracts are subject to the jurisdiction of the courts of the EU Member States) for jurisdiction to be exercised by one or other of the courts making up the Court of Justice of the European Union. (Europa EU, EUR Lex)

EU Arbitration, may also refer in the EU Taxation legislative context, to the EU Arbitration Convention of 1995 (EUR Lex – 90/463)

The EU code of conduct on transfer pricing documentation recommends that the documentation of a multinational enterprise should consist of two main parts, a master file and a country specific file. The master file contains common standardised information relevant for all EU group members. (UN Manual on Transfer Pricing 2021)

A term that is difficult to define but which is generally used to mean illegal arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities. (OECD’s Tax Glossary Terms)

The fair market value is the value that a particular asset or service would fetch on the open market on the assumption that adequate knowledge of the market is available to the buyer and seller, they are acting in their best interests without external pressures and a reasonable amount of time is allowed for the transaction to take place. (UN Manual on Transfer Pricing 2021)

Under formulary apportionment a formula is used to apportion the group’s net income between the various entities and branches in the group. The formula normally uses factors such as property, payroll, turnover, capital invested or manufacturing costs. (UN Manual on Transfer Pricing 2021)

Forum on Tax Administration, is formed by Commissioners and tax administration officials from over 50 tax administrations from all regions of the world, to enhance the effectiveness, efficiency and resiliency of tax administration (OECD, FTA)

The analysis aimed at identifying the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed by the parties to the transactions. (OECD, TP Guidelines 2022).

An analysis involving the identification of functions performed, assets employed and risks assumed with respect to the international controlled transactions of an enterprise. The functional analysis seeks to identify and compare the economically significant activities and the responsibilities undertaken by the independent and associated enterprises. (UN Manual on Transfer Pricing 2021)

An approach to allocate the global profits of an MNE group on a consolidated basis among the associated enterprises in different jurisdictions on the basis of a predetermined formula. (OECD, TP Guidelines 2022).

The gross profits from a business transaction are the amount computed by deducting from the gross receipts of the transaction the allocable purchases or production costs of sales, with due adjustment for increases or decreases in inventory or stock-in-trade, but without taking account of other expenses. (OECD, TP Guidelines 2022).

The result of deducting from total sales the cost of sales, including all the expenses directly incurred in relation to those sales. (UN Manual on Transfer Pricing 2021)

A special department within a parent company or regional holding company, or any other associated enterprise within a multinational group such as a group services company, providing services to associated enterprises. (UN Manual on Transfer Pricing 2021)

Multinational groups and the associated enterprises that are parts of groups may sometimes benefit from interactions or synergies among group members that are not generally available to independent enterprises in a similar situation. These could arise for example from: combined purchasing power; economies of scale; integrated management; or increased borrowing capacity. (UN Manual on Transfer Pricing 2021)

Hard-to-value intangibles are intangible assets or rights in intangibles for which there are no reliable comparables at the time of their transfer between associated enterprises, and there is no reliable projection of future cash flows or income expected to be derived from the transferred intangible at the transfer date; or where the assumptions used in valuing the intangible are highly uncertain. (UN Manual on Transfer Pricing 2021)

“6.189 The term hard-to-value intangibles (HTVI) covers intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises, (i) no reliable comparables exist, and (ii) at the time the transactions was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.

6.190. Transactions involving the transfer or the use of HTVI in paragraph 6.189 may exhibit one or more of the following features:

• The intangible is only partially developed at the time of the transfer.

• The intangible is not expected to be exploited commercially until several years following the transaction.

• The intangible does not itself fall within the definition of HTVI in paragraph 6.189 but is integral to the development or enhancement of other intangibles which fall within that definition of HTVI.

• The intangible is expected to be exploited in a manner that is novel at the time of the transfer and the absence of a track record of development or exploitation of similar intangibles makes projections highly uncertain.

• The intangible, meeting the definition of HTVI under paragraph 6.189, has been transferred to an associated enterprise for a lump sum payment.

• The intangible is either used in connection with or developed under a CCA or similar arrangements.”

(OECD, TP Guidelines 2022)

Expenses of the head office of a legal entity, some of which may relate to an overseas branch of the same legal entity. (UN Manual on Transfer Pricing 2021)

ICAP is a voluntary risk assessment and assurance programme to facilitate open and cooperative multilateral engagements between MNE groups willing to engage actively and transparently and tax administrations in jurisdictions where they have activities.

By co-ordinating conversations between an MNE group and multiple tax administrations, ICAP supports the effective use of transfer pricing documentation, including the MNE group’s Country-by-Country report, providing a faster, clearer and more efficient route to improved multilateral tax certainty. ICAP should reduce the resource burden on both MNE groups and tax administrations, meaning fewer disputes requiring resolution through mutual agreement proceedings. Where an area is identified as needing further attention, work conducted in ICAP can improve the efficiency of compliance action taken outside the programme, if needed. (OECD International Compliance Assurance Programme, 2018)

To the extent that a borrower that is a member of an MNE benefits from an improved credit rating solely on the basis of implicit support from the MNE, without an explicit guarantee, no payment would be required for the benefit. (UN Manual on Transfer Pricing 2021)

One associated enterprise may provide an intragroup service to another associated enterprise under circumstances where that service also incidentally gives rise to benefits being received by other members of the MNE group other than the primary beneficiary of the service. The determination of whether a service fee should be paid by the incidental beneficiaries of the service depends on the facts and on whether an independent party in the same circumstances would have been willing to pay for the service. (UN Manual on Transfer Pricing 2021)

Two enterprises are independent enterprises with respect to each other if they are not associated enterprises with respect to each other. (OECD, TP Guidelines 2022).

A method of charging for intra-group services based upon cost allocation and apportionment methods. (OECD, TP Guidelines 2022).

Indirect charge method A method under which fees for intragroup services are computed on the basis of apportionment of costs using an allocation key, with an appropriate mark-up. (UN Manual on Transfer Pricing 2021)

Costs of producing a product or service which, although closely related to the production process, may be common to several products or services (for example, the costs of a repair department that services equipment used to produce different products). (OECD, TP Guidelines 2022)

Intangibles are property that have no physical existence but whose value depends on the legal rights of the owner. Examples of intangibles are intellectual property such as patents, copyright and trademarks. (UN Manual on Transfer Pricing 2021)

An activity (e.g. administrative, technical, financial, commercial, etc.) for which an independent enterprise would have been willing to pay or perform for itself. (OECD, TP Guidelines 2022)

A benefit provided by one associated enterprise to another associated enterprise within the group that is deliberately balanced to some degree by different benefits received from that enterprise in return. (UN Manual on Transfer Pricing 2021); (OECD, TP Guidelines 2022)

This term is used in the transfer pricing rules of some countries to describe the values between the 25th and 75th percentile of the range of arm’s length results derived from application of a transfer pricing method. In some jurisdictions this range may be used as the arm’s length range. (UN Manual on Transfer Pricing 2021)

Transactions between one of the parties to a controlled transaction (taxpayer or related enterprise) and an independent party. (UN Manual on Transfer Pricing 2021)

Services carried out by one entity in a multinational group for another entity or entities in the same group. (UN Manual on Transfer Pricing 2021)

The Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) has 42 member countries and provides a means for tax administrations to exchange information and engage in collaborative casework, within the framework of bilateral and multilateral conventions and tax information exchange agreements. Membership is open to all member countries of the OECD’s Forum on Tax Administration (FTA). (UN Manual on Transfer Pricing 2021)

Because of the special relationship between risks and financial assets in those specific sectors, the authorised OECD approach uses the key entrepreneurial risk-taking function (KERT function) terminology in describing the functions relevant to the attribution of both risks and assets, but that terminology is not used for other sectors. Outside the financial enterprise sector, risks may be less intimately linked with assets, so that there may be less overlap between the significant people functions relevant to the assumption of risk and those relevant to the economic ownership of the assets. (OECD Report on Profit Attribution to PE,2010)

Risks such as ‘risk of loss associated with capital investment’, ‘single customer risk’, ‘risk of losing human capital intangible’, etc. are categorized as ‘Entrepreneurial Risk’. (UN Manual on Transfer Pricing 2021)

Large Business & International Programme of the FTA (LBIP) of the FTA brings together 46 member countries to develop frameworks, information and other tools to improve tax administrations individual and collective capacity to manage international tax risks. The LBIP currently provides the umbrella under which a number of complimentary projects, focused on tax risk assessment and assurance as an area for multilateral action, are being carried forward i.e. ICAP, Comparative Risk Assessment and Joint Audits. Together with the FTA MAP Forum, the LBIP is currently undertaking further work on improving the APA process, opportunities for the greater use of multilateral APAs and MAP, and the wider use of standardised benchmarking in common transfer pricing situations. (OECD, FTA)

The final BEPS report on Action 13 (2015) on transfer pricing documentation included a reporting requirement that groups should prepare a local file containing details of related party transactions of the local taxpayer including a description of the transactions, a comparability analysis and the selection and application of transfer pricing methods. (UN Manual on Transfer Pricing 2021)

Location rents are the incremental profits arising to a multinational group from location specific advantages in a particular location. Location savings Cost savings or benefits such as cheaper production or service costs resulting from locating a manufacturing or other operation in a low-cost jurisdiction. (UN Manual on Transfer Pricing 2021)

Cost savings or benefits such as cheaper production or service costs resulting from locating a manufacturing or other operation in a low-cost jurisdiction.

The relocation of a business may, in addition to location savings, give some other locationspecific advantages (LSAs). These LSAs could include: highly specialized skilled manpower and knowledge; proximity to a growing local/regional market; a large customer base with increased spending capacity; advanced infrastructure; or market premium. (UN Manual on Transfer Pricing 2021)

Low value-adding services are services of a supportive nature; not part of the core business of the group; not involving the use of, or leading to the creation of, unique and valuable intangibles; and not involving the assumption or creation of significant risk for the service provider. The BEPS recommendations suggest that a group could elect to use a simplified method for low value-adding services covering all the countries in which it operates.

Low value-adding services are services of a supportive nature; not part of the core business of the group; not involving the use of, or leading to the creation of, unique and valuable intangibles; and not involving the assumption or creation of significant risk for the service provider. The BEPS recommendations suggest that a group could elect to use a simplified method for low value-adding services covering all the countries in which it operates (UN Manual on Transfer Pricing 2021)

An intangible (within the meaning of paragraph 6.6) that relates to marketing activities, aids in the commercial exploitation of a product or service and/or has an important promotional value for the product concerned. Depending on the context, marketing intangibles may include, for example, trademarks, trade names, customer lists, customer relationships, and proprietary market and customer data that is used or aids in marketing and selling goods or services to customers (OECD, TP Guidelines 2022).

Intangibles relating to marketing activities, aiding in the commercial exploitation of a product or service or with important promotional value for a product or service (UN Manual on Transfer Pricing 2021)

The final BEPS report on Action 13 (2015) on transfer pricing documentation included a reporting requirement for groups to prepare a master file to supply general information on the group of which the taxpayer is a member, including a description of the group and its organizational structure, a description of its business, intangibles employed, intragroup financial activity and the financial and tax position of the group. (UN Manual on Transfer Pricing 2021)

The terms middle and back office are reproduced as they are common terms used in describing the functions of banking operations. (OECD Report on Profit Attribution to PE, 2010)

The median value is the value at the mid-point of the arm’s length range. Transfer pricing rules sometimes provide that a transfer price that is outside the arm’s length range should be adjusted to the median value of the range. (UN Manual on Transfer Pricing 2021)

ADR Tool to that relies on the role of a mediator to settle the dispute. The main difference is the output, which is a mediated settlement ending in an agreed decision between the parties.

The purpose of this Agreement is to promote international co-operation in tax matters through exchange of information. It was developed by the OECD Global Forum Working Group on Effective Exchange of Information.

The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of information is one of the key criteria in determining harmful tax practices. The Agreement represents the standard of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices. (OECD, 2002)

Data in respect of the controlled and comparable transactions covering a number of years. (UN Manual on Transfer Pricing 2021)

A procedure by which the competent authorities of contracting states consult with a view to resolving disputes over the application of double tax conventions. This procedure may be used to eliminate double taxation arising from a transfer pricing dispute. (UN Manual on Transfer Pricing 2021)

A means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment. (OECD Report on Profit Attribution to PE,2010)

A company that is part of an MNE group. (OECD, TP Guidelines 2022).

An MNE is an enterprise with integrated business operations in more than one country, generally operating across international borders through locally incorporated subsidiaries, permanent establishments or other types of legal structure such as joint ventures. (UN Manual on Transfer Pricing 2021)

A group of associated companies with business establishments in two or more jurisdictions. (OECD, TP Guidelines 2022).

A means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorised by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment. (OECD, TP Guidelines 2022).

Some products, such as government securities, may have a primary trading market - sometimes called a “natural home” - where the bulk of trading in that product occurs. (OECD Report on Profit Attribution to PE,2010)

The ratio of net profit to an appropriate base (e.g. costs, sales, assets). The transactional net margin method relies on a comparison of an appropriate net profit indicator for the controlled transaction with the same net profit indicator in comparable uncontrolled transactions. (OECD, TP Guidelines 2022).

The term “non-recognition” refers to a situation where the tax administration does not accept the taxpayer’s characterization of a transaction and therefore disregards the transaction. In general, non-recognition or substitution of transactions by the tax administration should not be undertaken lightly as this would create significant uncertainty for the taxpayer and the tax administration. It may also lead to double taxation due to the divergent views taken by countries on how any substitute transactions are structured. (UN Manual on Transfer Pricing 2021)

A means through which tax administrations consult to resolve disputes regarding the application of double tax conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment.

Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD, 1995. The OECD Guidelines are regularly amended and updated. (UN Manual on Transfer Pricing 2021)

The net income of a company after deducting direct and indirect expenses but before deductions for interest and taxes. (UN Manual on Transfer Pricing 2021)

Services provided by a parent company or a group service centre, which are available at any time for members of an MNE group. (OECD, TP Guidelines 2022).

Benefits to members of an MNE may arise as a result of an associated entity’s membership of the MNE. Such benefits are attributable to the entity’s passive association with the MNE and are not normally a chargeable service for member entities of the MNE. For example, independent enterprises transacting with an enterprise that is a member of an MNE group may be willing to provide goods or services to it at prices that are below the prices charged to independent buyers. (UN Manual on Transfer Pricing 2021)

Permanent establishment refers to a concept under bilateral tax treaties that establishes whether a company has a “footprint” in a jurisdiction and would thus be liable for corporate income tax attributable to the PE. (UN Manual on Transfer Pricing 2021)

The PCT is a joint initiative of the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), the United Nations, and the World Bank Group to strengthen collaboration on domestic resource mobilization (DRM). (UN Manual on Transfer Pricing 2021)

(see: Transfer Pricing Adjustment).

An adjustment made by the tax authorities to the profits of an enterprise after determining that the transfer price of a transaction with a related party does not conform to the arm’s length principle. (UN Manual on Transfer Pricing 2021)

Presumptive taxation provisions give tax authorities the power to presume an arm’s length price based on information gathered by the authorities, and to reassess the taxpayer’s taxable income on that basis. Such provisions are generally only regarded as applicable in case of the taxpayer’s failure to provide relevant documentation on the arm’s length price within a reasonable time. Presumptive taxation is usually provided for as a last resort. (UN Manual on Transfer Pricing 2021)

An adjustment that a tax administration in a first jurisdiction makes to a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction (OECD, TP Guidelines 2022).

An adjustment that a tax administration in a first jurisdiction makes to a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction. (UN Manual on Transfer Pricing 2021)

The expected future profits. In some cases it may encompass losses. The notion of “profit potential” is often used for valuation purposes, in the determination of an arm’s length compensation for a transfer of intangibles or of an ongoing concern, or in the determination of an arm’s length indemnification for the termination or substantial renegotiation of existing arrangements, once it is found that such compensation or indemnification would have taken place between independent parties in comparable circumstances. (OECD, TP Guidelines 2022).

A transactional profit split method that identifies the relevant profits to be split for the associated enterprises from a controlled transaction (or controlled transactions that it is appropriate to aggregate under the principles of Chapter III) and then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been agreed at arm’s length. (OECD, TP Guidelines 2022)

This method seeks to eliminate the effect on profits of non-arm’s length conditions made or imposed in controlled transactions by determining the division of profits that independent enterprises would have expected to realize from engaging in the transactions (UN Manual on Transfer Pricing 2021)

A measure of a company’s profitability that is used to compare comparables with the tested party. A PLI may express profitability in relation to (i) sales, (ii) costs or expenses, or (iii) assets. (UN Manual on Transfer Pricing 2021)

Related parties are entities under common management, control or ownership, or where one entity controls the other entity. (UN Manual on Transfer Pricing 2021)

A margin representing the amount out of which a reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit. (OECD, TP Guidelines 2022).

A transfer pricing method based on the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. The resale price is reduced by the resale price margin. What is left after subtracting the resale price margin can be regarded, after adjustment for other costs associated with the purchase of the product (e.g. custom duties), as an arm’s length price of the original transfer of property between the associated enterprises. (OECD, TP Guidelines 2022).

(RPM) This method analyzes the price of a product that a related sales company charges to an unrelated customer, i.e. the resale price, to determine an arm’s length gross margin that the sales company retains to cover its sales, general and administrative expenses and still make an appropriate profit. The remainder of the product’s price is regarded as the arm’s length price for the transactions between the sales company and a related party (UN Manual on Transfer Pricing 2021)

An analysis used in the profit split method which divides the relevant profits from the controlled transactions under examination into two categories. In the first category are profits attributable to contributions which can be reliably benchmarked: typically less complex contributions for which reliable comparables can be found. Ordinarily this initial remuneration would be determined by applying one of the traditional transaction methods or a transactional net margin method to identify the remuneration of comparable transactions between independent enterprises. Thus, it would generally not account for the return that would be generated by a second category of contributions which may be unique and valuable, and/or are attributable to a high level of integration or the shared assumption of economically significant risks. Typically, the allocation of any residual profit (or loss) remaining after allowing for the profits attributable to the first category of contributions would be based on an analysis of the relative value of the second category of contributions by the parties, supplemented where possible by external market data that indicate how independent enterprises would have divided profits in similar circumstances. (OECD, TP Guidelines 2022).

Where a residual analysis is used under the profit split method, the relevant profits in relation to the transactions are allocated between the associated enterprises based on a two-step approach. In the first step, a “routine” arm’s length profit for the basic or “routine” contributions of each enterprise is determined, e.g. through the application of a one-sided method using information from uncontrolled transactions. In the second step, the residual profit remaining after deducting those “routine” returns is split between the enterprises, generally based on their relative contributions. (UN Manual on Transfer Pricing 2021)

Under certain circumstances an advance pricing agreement (APA) in respect of future tax years may be rolled back and used as an appropriate transfer pricing method for past open tax years, considering all facts and circumstances. (UN Manual on Transfer Pricing 2021)

A ruling or advance ruling is a written statement issued to the taxpayer by the tax authorities interpreting and applying the tax law to a specific set of facts. (UN Manual on Transfer Pricing 2021)

A provision in the tax law, regulations or guidelines stating that transactions falling within a certain range will be accepted by the tax authorities without further investigation. (UN Manual on Transfer Pricing 2021)

An adjustment that arises from imposing tax on a secondary transaction. (OECD, TP Guidelines 2022).

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An adjustment that arises from imposing tax on a secondary transaction. A secondary transaction is a constructive transaction that may be asserted in some countries after making a primary adjustment, in order to make the actual allocation of profits consistent with the primary adjustment. Secondary transactions may take the form of constructive dividends, constructive equity contributions or constructive loans. (UN Manual on Transfer Pricing 2021)

A constructive transaction that some jurisdictions will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans. (OECD, TP Guidelines 2022).

This generally refers to the use of information or data about a taxpayer by the tax authorities to form the basis of transfer pricing scrutiny of another taxpayer, who is often not given access to that information, because for example it may reveal information about a competitor’s operations. (UN Manual on Transfer Pricing 2021)

An activity which is performed by a member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. (OECD, TP Guidelines 2022).

Services performed by a member of a multinational group (usually the parent company or a holding company) in its capacity as a shareholder, for example preparation of consolidated accounts. (UN Manual on Transfer Pricing 2021)

Allocation of income and expenses between related corporations or branches of the same legal entity in order to reduce the overall tax liability of the group or corporation. (UN Manual on Transfer Pricing 2021)

A simultaneous tax examination, as defined in Part A of the OECD Model Agreement for the Undertaking of Simultaneous Tax Examinations, means an “arrangement between two or more parties to examine simultaneously and independently, each on its own territory, the tax affairs of (a) taxpayer(s) in which they have a common or related interest with a view to exchanging any relevant information which they so obtain”. (OECD, TP Guidelines 2022).

The “sixth method” or commodity rule is an approach used in certain countries of Latin America and elsewhere, and requires commodity market quoted prices of imported or exported goods at a specified date to be used to compute the transfer price. There are considerable variations both in the scope of the rule and its application. (UN Manual on Transfer Pricing 2021)

SMEs may be defined in the general tax or transfer pricing legislation of a country as enterprises that are below a certain threshold amount of assets, turnover, employee numbers etc. An SME operating in two or more countries may need to comply with the transfer pricing legislation, but some countries have introduced simplified transfer pricing rules for SMEs such as simplified documentation requirements. (UN Manual on Transfer Pricing 2021)

Each tax administration taking part in ICAP has a single point of contact (SPOC) to lead cooperation and collaboration within the programme, who may be supported by a shadow single point of contact (shadow SPOC) who is able and authorised to act on the SPOC’s behalf. The SPOC and shadow SPOC must have competent authority status and a level of seniority within their tax administration to be able to deliver on the tax administration’s commitments to ICAP. For a particular jurisdiction, the same official may fulfil the ICAP steering group position and the SPOC role. (OECD, ICAP Report,2021)

The tested party is the party in relation to which a financial indicator (e.g. mark-up on cost, gross margin or net profit) is tested when using the cost plus, resale price or transactional net margin methods. (UN Manual on Transfer Pricing 2021)

Tax Information Exchange Agreement, is an international agreement to promote international co-operation in tax matters through exchange of information. (OECD, TIEA)

See Transactional Net Margin Method. (UN Manual on Transfer Pricing 2021)

An intangible other than a marketing intangible. (OECD, TP Guidelines 2022).

Trade intangibles are commercial intangibles other than marketing intangibles. Examples of trade intangibles are patents or copyrights (UN Manual on Transfer Pricing 2021)

The comparable uncontrolled price method, the resale price method, and the cost plus method. (OECD, TP Guidelines 2022).

A transactional profit method that examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction (or transactions that it is appropriate to aggregate under the principles of Chapter III). (OECD, TP Guidelines 2022).

This Method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction. This is compared to the net profit margins earned in comparable uncontrolled transactions. (UN Manual on Transfer Pricing 2021)

A transfer pricing method that examines the profits that arise from particular controlled transactions of one or more of the associated enterprises participating in those transactions. (OECD, TP Guidelines 2022).

The general term for the pricing of cross-border, intragroup transactions in goods, intangibles or services. (UN Manual on Transfer Pricing 2021)

An adjustment made by the tax authorities to the profits of an enterprise after determining that the transfer price of a transaction with a related party does not conform to the arm’s length principle. (UN Manual on Transfer Pricing 2021)

A transfer pricing method is a methodology by which the arm’s length principle is applied to determine the arm’s length price of a transaction. Examples of transfer pricing methods are the comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method and profit split method. Other appropriate methods are also used in some jurisdictions. (UN Manual on Transfer Pricing 2021)

Transactions between enterprises that are independent enterprises with respect to each other. (OECD, TP Guidelines 2022).

Uncontrolled transaction A transaction between independent and unrelated enterprises. (UN Manual on Transfer Pricing 2021)

Contributions (for instance functions performed, or assets used or contributed) will be “unique and valuable” in cases where (i) they are not comparable to contributions made by uncontrolled parties in comparable circumstances, and (ii) they represent a key source of actual or potential economic benefits in the business operations. (OECD, TP Guidelines 2022).

The process or the activities by which a company adds value to goods or services, including production, marketing, and the provision of after-sales service. (UN Manual on Transfer Pricing 2021)