Editing Transfer pricing (section)

==In general==

Over sixty governments have adopted transfer pricing rules,<ref>Several websites provide overviews of transfer pricing regulations by country, such as the [http://www.tpanalytics.com/tp-reference/country-references/ Country References] {{Webarchive|url=https://web.archive.org/web/20111020124306/http://www.tpanalytics.com/tp-reference/country-references/ |date=2011-10-20 }} on the TP analytics website.</ref>  which in almost all cases (with the notable exception of [[Kazakhstan]]) are based on the arm's-length principle.<ref>See, e.g., OECD Guidelines 1.1 et seq., [http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.179&idno=26 26 CFR 1.482-1(b)] {{Webarchive|url=https://web.archive.org/web/20121006102643/http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.179&idno=26 |date=2012-10-06 }}.</ref>  The rules of nearly all countries permit related parties to set prices in any manner, but permit the tax authorities to adjust those prices (for purposes of computing tax liability) where the prices charged are outside an arm's length range.  Most, if not all, governments permit adjustments by the tax authority even where there is no intent to avoid or evade tax.<ref>See, e.g., [http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.179&idno=26 26 CFR 1.482-1(f)(1)(i).] {{Webarchive|url=https://web.archive.org/web/20121006102643/http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.179&idno=26 |date=2012-10-06 }}</ref> The rules generally require that market level, functions, risks, and terms of sale of unrelated party transactions or activities be reasonably comparable to such items with respect to the related party transactions or profitability being tested.

Adjustment of prices is generally made by adjusting taxable income of all involved related parties within the jurisdiction, as well as adjusting any withholding or other taxes imposed on parties outside the jurisdiction. Such adjustments are generally made after filing of tax returns. For example, if Bigco US charges Bigco Germany for a machine, either the U.S. or German tax authorities may adjust the price upon examination of the respective tax return.  Following an adjustment, the taxpayer generally is allowed (at least by the adjusting government) to make payments to reflect the adjusted prices.

Most systems allow use of transfer pricing multiple methods, where such methods are appropriate and are supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, [[cost-plus]], resale price or markup, and profitability based methods. Many systems differentiate methods of testing goods from those for services or use of property due to inherent differences in business aspects of such broad types of transactions. Some systems provide mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a manner designed to reduce tax controversy. Most governments have granted authorization to their tax authorities to adjust prices charged between related parties.<ref>See, ''e.g''., law of the U.S. at [https://www.law.cornell.edu/uscode/text/26/482- 26 USC 482], UK at [http://www.opsi.gov.uk/acts/acts1988/ukpga_19880001_en_63 ICTA88/s770], Canada.{{Citation needed|date=July 2010}} Note that OECD Guidelines leave this issue to member governments.</ref>   Many such authorizations, including those of the United States, United Kingdom, Canada, and Germany, allow domestic as well as international adjustments.  Some authorizations apply only internationally.{{Citation needed|date=July 2010}}

In addition, most systems recognize that an arm's length price may not be a particular price point but rather a range of prices. Some systems provide measures for evaluating whether a price within such range is considered arm's length, such as the ''interquartile range'' used in U.S. regulations.  Significant deviation among points in the range may indicate lack of reliability of data.<ref>OECD Guidelines 1.45, 41; 26 CFR 1.482-1(e).</ref>  Reliability is generally considered to be improved by use of multiple year data.<ref>OECD Guidelines 1.49-1.51; 26 CFR 1.482-1(f)(2)(iii).</ref>

Most rules require that the tax authorities consider actual transactions between parties, and permit adjustment only to actual transactions.<ref>OECD Guidelines 1.36-1.41. and 26 CFR 1.482-1(f)(2)(ii).</ref>  Multiple transactions may be aggregated or tested separately, and testing may use multiple year data.  In addition, transactions whose economic substance differs materially from their form may be recharacterized under the laws of many systems to follow the economic substance.

Transfer pricing adjustments have been a feature of many tax systems since the 1930s. The United States led the development of detailed, comprehensive transfer pricing guidelines with a [https://web.archive.org/web/20121104083933/http://www.highbeam.com/doc/1G1-7322170.html White Paper] in 1988 and proposals in 1990–1992, which ultimately became regulations in 1994.<ref>TD 8552, 1994-2 C.B. 93.</ref>  In 1995, the OECD issued its transfer pricing guidelines which it expanded in 1996 and 2010.<ref>For a history of the earlier OECD efforts, see [http://unpan1.un.org/intradoc/groups/public/documents/un/unpan002475.pdf paper presented to the United Nations] in 2001.</ref>  The two sets of guidelines are broadly similar and contain certain principles followed by many countries. The OECD guidelines have been formally adopted by many European Union countries with little or no modification.