GUIDELINES

The OECD (Organization of Economic Cooperation & Development) mission is to bring together the governments of countries committed to democracy and the market economy from around the world in order to support sustainable economic growth, boost employment, raise living standards, maintain financial stability, assist other countries' economic development, contribute to growth in world trade.

The Organisation provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies. The member countries in 2010 are Australia, Austria, Canada, Czeck Republik, Belgium, Chile, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Korea, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, U.K., U.S.A. (Estonia, Russia, India, China, Brazil, Indonesia, South Africa have opened the joining process). Also the European Community takes part to OECD works and has created a specific commission of EU experts – 1 for each country - EUJPTF - which has completed on 7/11/2005 a Code of Conduct approved with the EU Directive 2006/C176/01 published on 28/7/2006.

The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on the application of the "arm's length principle" (valore normale) for the valuation, for tax purposes, of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm's length remuneration for their cross-border transactions with associated enterprises.

The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations were originally approved by the OECD Council in 1995. They were completed with additional guidance on cross-border services, intangibles, costs contribution arrangements and advance pricing arrangements in 1996-1999. In the 2009 edition, some amendments were made to Chapter IV, primarily to reflect the latest developments on dispute resolution.

In 2010, Chapters I-III were substantially revised with the addition of new guidance on the selection of the most appropriate transfer pricing method to the circumstances of the case, on how to apply transactional profit methods (the transactional net margin method and the profit split method) and on how to perform a comparability analysis. Furthermore, a new Chapter IX was added, dealing with the transfer pricing aspects of business restructurings.

The guidelines index is including (the key points for small MNEs are highlighted in Blue ):

Foreword / Preface / Glossary

Chapter I. The Arm's Length Principle (revised in 2010 edition)

1. Introduction
2. Statement of the arm's length principle
3. A non-arm's-length approach: global formulary apportionment
4. Guidance for applying the arm's length principle

Chapter II. Transfer Pricing Methods (revised in 2010 edition)

• Part I. Selection of the transfer pricing method
• Part II. Traditional transaction methods
• Part III. Transactional profit methods

Chapter III. Comparability Analysis (revised in 2010 edition)

1. Performing a comparability analysis
2. Timing issues in comparability
3. Compliance issues

Chapter IV. Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes (updated in 2010 edition)

1. Introduction
2. Transfer pricing compliance practices
3. Corresponding adjustments and the mutual agreement procedure: Articles 9 and 25 of the OECD Model Tax Convention
4. Simultaneous tax examinations
5. Safe Harbours
6. Advance pricing arrangements
7. Arbitration

Chapter V. Documentation (updated in 2010 edition)

1. Introduction
2. Guidance on documentation rules and procedures
3. Useful information for determining transfer pricing
4. Summary of recommendations on documentation

Chapter VI. Special Considerations for Intangible Property (updated in 2010 edition)

1. Introduction
2. Commercial intangibles
3. Applying the arm's length principle
4. Marketing activities undertaken by enterprises not owning trademarks or trade names Chapter

Chapter VII. Special Considerations for Intra-Group Services (updated in 2010 edition)

1. Introduction
2. Main issues
3. Some examples of intra-group services

Chapter VIII. Cost Contribution Arrangements (updated in 2010 edition)

1. Introduction
2. Concept of CCA
3. Applying the arm's length principle
4. Tax consequences is a CCA is not arm's length
5. CCA entry, withdrawal, or termination
6. Recommendations for structuring and documenting CCAs Chapter

IX. Transfer Pricing Aspects of Business Restructurings (new to 2010 edition) -Introduction

1. Scope
2. Applying Article 9 of the OECD Model Tax Convention and these guidelines to business restructurings: theoretical framework

- Part I. Special considerations for risks

1. Introduction
2. Contractual terms
3. Compliance issues

- Part II. Arm's length compensation for the restructuring itself

1. Introduction
2. Understanding the restructuring itself
3. Reallocation of profit potential as a result of business restructuring
4. Transfer of something of value (e.g. an asset or an ongoing concern)
5. Indemnification of the restructured entity for the termination or substantial renegotiation of existing arrangements

-Part III. Remuneration of post-restructuring controlled transactions

1. Business restructurings vs. "structuring"
2. Application to business restructuring situations: selection and application of a transfer pricing method for the post-restructuring controlled transactions
3. Relationship between compensation for the restructuring and post-restructuring remuneration
4. Comparing the pre- and post-restructuring situations
5. Location savings

-F. Example: Implementation of a central purchasing function
-Part IV. Recognition of the actual transactions undertaken

1. Introduction
2. Transactions actually undertaken. Role of contractual terms.
3. applications of paragraphs 1.64-1.69 of these guidelines to business restructuring situations
4. Examples

Annexes

• Annex: Guidelines for Monitoring Procedures on the OECD Transfer Pricing Guidelines and the involvement of the business community
• Annex I to Chapter II. Sensitivity of Gross and Net Profit Indicators
• Annex II to Chapter II. Example to Illustrate the Application of the Residual Profit Split Method
• Annex III to Chapter II. Illustration of Different Measures of Profits When Applying a Transactional Profit Split Method
• Annex to Chapter III. Example of a Working Capital Adjustment
• Annex to Chapter IV. Guidelines for Conducting Advance Pricing Arrangements under the Mutual Agreement Procedure ("MAP APAs")
• Annex to Chapter VI. Examples to Illustrate the Guidance on Intangible Property and Highly Uncertain Valuation
• Appendix. Recommendation of the Council on the Determination of Transfer Pricing between Associated Enterprises [C(95)126/Final]

(*) The 2010 guidelines updated text of 375 pages is available on demand by our offices in the 'read only' .pdf version, as well like the Articles of the OECD Convention of 17/7/2008 of 20 pages.

DOCUMENTS AND COMPLIANCE

The 2006 Code of Conduct EU approved, above mentioned, is foreseeing as necessary documentation:

1) a 'master file' to be created on care of the group mother company including a general group description, of the activity area or areas, of the activities more in detail and of the transfer pricing basic criteria adopted for the whole group.

2) a 'country specific file' on care of the local country controlled or branch entity, in which must be described activities, characteristics, roles, transactions, methods and margins related to all international transactions. It is the local entity to remain legally responsible in front of the country's tax offices for custody and delivery of the 2 documents.

3) both documents must also include reference to a specific choice among the transfer pricing methods foreseen from the art. 7 of the OECD Model Convention 17.7.2008:

1. Comparable uncontrolled price (CUP) method (comparison with similar market transactions to identify if the 'arm's length principle' is respected)
2. Resale price method (ex. different distributors comparison)
3. Cost plus method (ex. different countries mark up comparison).

According to the art. 7 of the OECD Convention of 17.7.2008, it should be also respected the so called 'compliance' with the procedures', which are :

1. Audit procedures
2. Probationary charge
3. Administrative penalties system (documentation/ cooperation or adjustment related)

Further the principles by which the income should be assigned to the local permanent establishment are:

1. the local tax office can tax the mother company profit only according to the portion of profit produced from the local permanent establishment entity in the country in which the same is established (paragraph 1)
2. those which should have been produced if, instead of operating with the mother company, the same would have been operating with independent third parties at market conditions (paragraph 2).

THE ADVISABLE 'STEP BY STEP' PHASES TO ESTABLISH THE CORRECT INCOME OF THE PERMANENT ESTABLISHMENT:

• Definition of the function of each single unit involved in the company production or service process
• Definition of the 'key enterpreneuerial risk-taking' functions (KERT) : functions taking the economical and financial risks of the transactions (typical: negotiation with client and signature of commercial and/or sales agreements; cost sharing or contribution agreements ex. For : research & development, IT/ administration/ accounting, HR administration-management, marketing, financial, technical / legal, tax assistance services; often also using parameters between turnover and gross added value, margins, capital used, n. of employees etc.).
• Definition of KERT functions location to establish accounting and tax relevance
• Assignment to the local permanent establishment of risk levels, activities and functions
• Definition of possible share capital of the permanent establishment and related interests ruling
• Evaluation of the dealings toward the permanent establishment considered as 'economic transactions owner', according to the transfer pricing guidelines and methods and preparation of the 'country specific file'.

"This note was compiled on the basis of information available to HTLC Network A.G. at the time of writing (24.10.2010). It reflects our understanding of the principal issues arising from the new legislation for member companies, and any errors might be those of HTLC Network A.G.; however, this note is not intended to constitute legal advice and no business or legal decision should be taken based solely on its content. Companies concerned about the impact of legislative changes on their business should seek expert legal/specialists assistance by HTLC Network or elsewhere.
HTLC Network is available to supply specialized consulting on demand for all the items treated in this document.".