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The Arm’s Length Principle is the cornerstone of global transfer pricing regulations, ensuring fairness in intercompany transactions. It is vital for businesses operating internationally to understand this principle to remain compliant and avoid disputes with tax authorities.
A Controlled Foreign Corporation (CFC) is a foreign company where more than 50% of its stock (by vote or value) is owned by U.S. shareholders. Each of these shareholders must own at least 10% of the company's stock.
The Cost Plus Method (CPM) is a transfer pricing method that starts with a supplier’s costs and adds a mark-up. This final price should reflect what an independent party would charge in similar circumstances. It ensures that even related-party transactions comply with the arm’s length principle.
Country-by-Country Reporting (CbCR) is a key compliance requirement for multinational enterprises (MNEs), aimed at increasing transparency in global tax practices. Below, you'll find answers to the most frequently asked questions about CbCR.
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.
The Comparable Uncontrolled Price (CUP) method is one of the most widely used approaches in transfer pricing. It is often discussed in the context of ensuring fair and arm’s-length pricing between related parties. Below, we’ll address the most common questions about the CUP method to help you understand its nuances and applications.
FTP is an internal pricing mechanism used by financial institutions to allocate interest income and expense among various business units.
In transfer pricing, FAR Analysis is the backbone of comparability. It evaluates the Functions performed, Assets used, and Risks assumed by each entity in a multinational enterprise (MNE) group.
An intercompany charge is a financial transaction between two entities within the same corporate group. This charge ensures that one entity pays for goods, services, financing, or intellectual property received from another related entity.
Intercompany pricing policies are an internal governance framework a multinational group uses to establish and justify the terms, conditions, and pricing of transactions between related legal entities. While the arm's length principle defines the required regulatory outcome, the intercompany policy defines the operational roadmap: the selected method, the target margin or rate, the necessary data inputs, and the functional owners accountable for its execution and monitoring.
A Local File is an entity-level transfer pricing document that sets out a single group entity's local business operations and material intercompany transactions. It provides the local tax authority with the analysis needed to assess whether those transactions are consistent with the arm's length principle under that jurisdiction's transfer pricing rules.
A Master File is a key component of transfer pricing documentation that provides a high-level overview of an MNE’s global business operations, transfer pricing policies, and financial arrangements.
The Multilateral Instrument (MLI) is a groundbreaking international treaty that modifies existing tax agreements to prevent tax avoidance and treaty abuse.
he Principal Purpose Test (PPT) is a key anti-abuse rule introduced under the OECD’s Base Erosion and Profit Shifting (BEPS) framework.
Profit Level Indicators (PLIs) are critical tools in the realm of transfer pricing, offering a way to evaluate and justify the pricing of intercompany transactions in line with the arm’s length principle.
The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realise from engaging in the transaction or transactions.
In short, Transfer pricing refers to the prices set for transactions between related entities within a multinational corporation.
Transfer pricing documentation is the set of reports and records a multinational group prepares to demonstrate that its intercompany transactions are priced at arm's length.
The transactional net margin method (TNMM) is one of the five transfer pricing methods recognized in the OECD Transfer Pricing Guidelines, and the most widely applied of the five. It tests arm's length pricing by comparing net profit margins to independent comparables. Definition, worked examples, PLI selection, and how it compares to the US CPM.