Glossary

An arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables 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.

source: OECD Transfer Pricing Guidelines Glossary

Affiliated Parties

Affiliated parties are entities linked by a common interest normall defined in terms of a certain level of shareholding or other criterion.

source: 2017 UN Transfer Pricing Manual Glossary

Advertising and Marketing Risk

The risk associated with spending to promote the brand and other marketing intangibles to achieve intended results.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Allocation Key

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/revenue, employee numbers, working hours or floor space.

source: 2017 UN Transfer Pricing Manual Glossary

Arm's Length Principle

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".

source: OECD Transfer Pricing Guidelines Glossary

Arm's Length Range

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.

source: OECD Transfer Pricing Guidelines Glossary

Arm's Length Range (U.S. Perspective)

The arm’s length range includes the results of all comparable transactions. This can be determined either on a full range or an interquartile range. Since the requirements for use of the full range of comparable results are not often satisfied, the use of statistical analysis to create a more reliable result by use of the interquartile range is often used.

The full range can be used if the transactions meet all the following criteria:

• when the controlled and uncontrolled transactions are “sufficiently similar”
• all material differences have been identified
• adjustments are made to eliminate the effect of such differences.

source: U.S. IRS Internal Practice Unit for Arm’s Length Standard

Arm’s Length Standard

The arm’s length standard means controlled parties should price transactions in the same way as uncontrolled parties under similar circumstances. The two primary factors are

1. degree of comparability and
2. the quality of the data and assumptions used in the analysis.

source: U.S. IRS Internal Practice Unit for Arm’s Length Standard

Artificial Profit Shifting

The allocation of inocme 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.

source: 2017 UN Transfer Pricing Manual Glossary

Assembed Workforce

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.

source: 2017 UN Transfer Pricing Manual Glossary

Associated Enterprises

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.

source: OECD Transfer Pricing Guidelines Glossary

Average

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.

source: 2017 UN Transfer Pricing Manual Glossary

Balancing Payment

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.

source: OECD Transfer Pricing Guidelines Glossary

Basic arm’s length return method

The basic arm’s length return method (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 realised 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.

source: 2017 UN Transfer Pricing Manual Glossary

Benefits Test

In the determination if one service performed by one (or more) entity is to be allocated and charged to one other (or more) group member, the activity must provide an economic or commercial value to enhance or maintain its commercial position, which in turn is determined by evaluating whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself.

source: OECD Transfer Pricing Guidelines Paragraph 7.55

Berry Ratio

The ratio of gross income to operating costs, sometimes used to establish the arm’s length price using the transactional net margin method.

source: 2017 UN Transfer Pricing Manual Glossary

Best Method Rule (U.S. perspective)

The US taxpayer must select the transfer pricing method, from the various methods discussed in IRC Section 482, that provides the most reliable measure of an arm’s length result, taking into consideration all the data available.

source: U.S. IRS Internal Practice Unit for Best Method Determination for an Inbound Distributor

Business Restructurings

The cross-border redeployment of functions, assets and risks by a multinational entity.

source: 2017 UN Transfer Pricing Manual Glossary

Buy-in Payment

A payment made by a new entrant to an already active CCA for obtaining an interest in any results of prior CCA activity.

source: OECD Transfer Pricing Guidelines Glossary

Buy-out Payment

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.

source: OECD Transfer Pricing Guidelines Glossary

Centralised Services

Services performed by a headquarters or group service company on behalf of a number of entities in the group. Typical centralised services include accounting, legal, pensions, payroll or tax

source: 2017 UN Transfer Pricing Manual Glossary

Commercial Intangible

An intangible that is used in commercial activities such as the production of a good or the provision of a service, as well as an intangible right that is itself a business asset transferred to customers or used in the operation of business.

source: OECD Transfer Pricing Guidelines Glossary

Commodity rule

See “sixth method”.

source: 2017 UN Transfer Pricing Manual Glossary

Comparability Adjustments

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.

source: 2017 UN Transfer Pricing Manual Glossary

Comparability Analysis

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.

source: OECD Transfer Pricing Guidelines Glossary

Comparability Factors

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.

source: 2017 UN Transfer Pricing Manual Glossary

Comparable Adjustable Transaction

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.

source: 2017 UN Transfer Pricing Manual Glossary

Comparable Data

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.

source: 2017 UN Transfer Pricing Manual Glossary

Comparable Profits Method

Under the US transfer pricing regulations CPM 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.

source: 2017 UN Transfer Pricing Manual Glossary

Comparable Search

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.

source: 2017 UN Transfer Pricing Manual Glossary

Comparable Uncontrolled Price (CUP) Method

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.

source: OECD Transfer Pricing Guidelines Glossary

Comparable Uncontrolled Transaction

A transaction between independent enterprises that is similar to the controlled transaction and takes place in similar circumstances.

source: 2017 UN Transfer Pricing Manual Glossary

Compensating Adjustment

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.

source: OECD Transfer Pricing Guidelines Glossary

Competent Authority

The Competent Authority is the person or office designated to represent a country’s government and its resident taxpayers with respect to transactions involving another country, and where such transactions are covered by a tax treaty between the two countries. A Competent Authority case typically involves a claim of underpayment (additional tax due) in the assessing country versus an overpayment (refund due) in the other country. The Competent Authority process is intended to ensure that the right amount of tax is allocated to each country and that the taxpayer does not incur double tax.

source: Global Transfer Pricing: U.S. Trending, Transfer Pricing 360 Blog, A. Tracy Gomes on April 5, 2013

Conduit Company

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.

source: 2017 UN Transfer Pricing Manual Glossary

Connected Persons

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.

source: 2017 UN Transfer Pricing Manual Glossary

Contemporaneous Documentation

Transfer pricing documentation prepared at the time that the relevant transactions take place.

source: 2017 UN Transfer Pricing Manual Glossary

Contribution Analysis

An analysis used in the profit split method under which the combined profits from controlled transactions are divided between the associated enterprises based upon the relative value of the functions performed (taking into account assets used and risks assumed) by each of the associated enterprises participating in those transactions, supplemented as much as possible by external market data that indicate how independent enterprises would have divided profits in similar circumstances.

source: OECD Transfer Pricing Guidelines Glossary

Control

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.

source: 2017 UN Transfer Pricing Manual Glossary

Controlled Foreign Corporation

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.

source: 2017 UN Transfer Pricing Manual Glossary

Controlled Transactions

Transactions between two enterprises that are associated enterprises with respect to each other.

source: OECD Transfer Pricing Guidelines Glossary

Coordination Centre

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.

source: 2017 UN Transfer Pricing Manual Glossary

Corresponding Adjustment

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.

source: OECD Transfer Pricing Guidelines Glossary

Cost Contribution Arrangement (“CCA”)

A CCA is a framework agreed among enterprises to share the costs and risks of developing, producing, or obtaining assets, services, or rights, and to determine the nature and extent of the interests of each participant in the results of the activity of developing, producing, or obtaining those assets, services, or rights. Development CCAs are those established for the joint development, production or the obtaining of intangibles or tangible assets. Services CCA are those established for obtaining services.

source: OECD Transfer Pricing Guidelines Glossary

Cost Plus Mark-up

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.

source: OECD Transfer Pricing Guidelines Glossary

Cost Plus Method

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.

source: OECD Transfer Pricing Guidelines Glossary

Cost Sharing Arrangement

A cost sharing arrangement (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.

source: 2017 UN Transfer Pricing Manual Glossary

Country by Country Report

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 giving details of entities, income and taxes paid in each jurisdiction and indicators of economic activity and substance.

source: 2017 UN Transfer Pricing Manual Glossary

Country File

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, internal and external comparables etc.

source: 2017 UN Transfer Pricing Manual Glossary

Credit Risk

This risk is associated with the possibility of late payment or non-payment by the customer.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Currency Risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

Direct-charge Method

A method of charging directly for specific intra-group services on a clearly identified basis.

source: OECD Transfer Pricing Guidelines Glossary

Direct Costs

Costs that are incurred specifically for producing a product or rendering service, such as the cost of raw materials.

source: OECD Transfer Pricing Guidelines Glossary

Documentation Requirements

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.

source: 2017 UN Transfer Pricing Manual Glossary

Duplicated Services

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 in each case.

source: 2017 UN Transfer Pricing Manual Glossary

EU Master File

The EU code of conduct on transfer pricing documentation recommends that the documentation of a multinational enterprise consists 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.

source: 2017 UN Transfer Pricing Manual Glossary

Fair Market Value

The fair market value is the value that a particular asset or service would fetch on the open market on the assumption that is 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.

source: 2017 UN Transfer Pricing Manual Glossary

Foreign Exchange Risk

The risk exists when profits can be affected by fluctuations in the exchange rate of a currency other than the functional currency in which the entity operates.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Functional Analysis

An analysis of the functions performed (taking into account assets used and risks assumed) by associated enterprises in controlled transactions and by independent enterprises in comparable uncontrolled transactions.

source: OECD Transfer Pricing Guidelines Glossary

General Business Risk

The risks related to the ownership of property, plant and equipment (PP&E). The risk of ensuring the PP&E is protected against physical loss, wear and tear, obsolescence, or damage.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Global Formulary Apportionment Method

A method to allocate the global profits of an MNE group on a consolidated basis among the associated enterprises in different countries on the basis of a predetermined formula.

source: OECD Transfer Pricing Guidelines Glossary

Gross Profits

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.

source: OECD Transfer Pricing Guidelines Glossary

Group Synergies

Multinational groups and the associated enterprises that are part 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.

source: 2017 UN Transfer Pricing Manual Glossary

Hard-to-value Intangibles

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.

source: 2017 UN Transfer Pricing Manual Glossary

Head Office Expenses

Expenses of the head office of a legal entity, some of which may relate to an overseas branch of the same legal entity.

source: 2017 UN Transfer Pricing Manual Glossary

Incidental Benefits

One associated enterprise may provide an intra-group 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 intra-group service.

source: 2017 UN Transfer Pricing Manual Glossary

Independent Enterprises

Two enterprises are independent enterprises with respect to each other if they are not associated enterprises with respect to each other.

source: OECD Transfer Pricing Guidelines Glossary

Indirect-charge Method

A method of charging for intra-group services based upon cost allocation and apportionment methods.

source: OECD Transfer Pricing Guidelines Glossary

Indirect Costs

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).

source: OECD Transfer Pricing Guidelines Glossary

Intangibles

Intangibles are property that has 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.

source: 2017 UN Transfer Pricing Manual Glossary

Intangible Ownership Risk

The risk of obsolescence of existing intangibles and the risk of infringing on the intellectual property (IP) rights of unrelated enterprises.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Interquartile Range

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.

source: 2017 UN Transfer Pricing Manual Glossary

Internal Comparables

Transactions between one of the parties to a controlled transaction (taxpayer or foreign related enterprise) and an independent party.

source: 2017 UN Transfer Pricing Manual Glossary

Intra-group Service

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

source: OECD Transfer Pricing Guidelines Glossary

Intentional Set-off

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.

source: OECD Transfer Pricing Guidelines Glossary

Inventory Risk

The risk to the change in value of raw materials, work in process and finished goods due to changes in market prices, damage, defects, or obsolescence.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions – Inbound

Joint International Tax Shelter Information Centre

The Joint International Tax Shelter Information Centre (JITSIC) was set up in 2004 as a joint task force to identify and curb abusive tax transactions. The current member states are Australia, Canada, Japan, UK, US, Korea (ROK) and China. Two countries, France and Germany, have observer status.

source: 2017 UN Transfer Pricing Manual Glossary

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

Local File

The final BEPS report on Action 13 (2015) on transfer pricing documentation included a reporting requirement that groups with turnover above a specified threshold 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.

source: 2017 UN Transfer Pricing Manual Glossary

Location Rents

Location rents are the incremental profits arising to a multinational group from location specific advantages in a particular location.

source: 2017 UN Transfer Pricing Manual Glossary

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.

source: 2017 UN Transfer Pricing Manual Glossary

Location Specific Advantages

The relocation of a business may in addition to location savings give some other location-specific 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.

source: 2017 UN Transfer Pricing Manual Glossary

Low Value-adding Services

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.

source: 2017 UN Transfer Pricing Manual Glossary

Make-sell Rights

This is the legal right to make and sell a product that incorporates a specific protected intellectual property. Valuation of these rights factor the useful life of the intellectual property, where useful life is the period of time economic benefits are expected to be derived from this intellectual property.

source: U.S. IRS Internal Practice Unit for Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA) – Initial Transaction

Market Risk (Distributor)

The risk that the distributor may be unable to resell the products at a price that will allow it to generate a profit or may be unable to resell the products (at all). This risk may result from business cycles, increased competition, declines in market demand, or changes in market perceptions.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Market Risk (Financial Instrument)

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks comprises three types of risk: currency risk, interest rate risk and other price risk.

Marketing Intangible

An intangible that is concerned with marketing activities, which aids in the commercial exploitation of a product or service and/or has an important promotional value for the product concerned.

source: OECD Transfer Pricing Guidelines Glossary

Master File

The final BEPS report on Action 13 (2015) on transfer pricing documentation included a reporting requirement for groups with turnover above a specified threshold 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.

source: 2017 UN Transfer Pricing Manual Glossary

Median

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.

source: 2017 UN Transfer Pricing Manual Glossary

Multinational Enterprise Group (MNE group)

A group of associated companies with business establishments in two or more countries.

source: OECD Transfer Pricing Guidelines Glossary

Multinational Enterprise (MNE)

A company that is part of an MNE group.

source: OECD Transfer Pricing Guidelines Glossary

Mutual Agreement Procedure

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.

source: OECD Transfer Pricing Guidelines Glossary

Nonroutine Contributions

Nonroutine contributions are contributions that are not accounted for as routine contributions. In general, nonroutine contributions include contributions of valuable intangible property that are not similar to that owned by uncontrolled taxpayers.

source: U.S. IRS Internal Practice Unit for Residual Profit Split Method – Outbound.

“On call” Services

Services provided by a parent company or a group service centre, which are available at any time for members of an MNE group.

source: OECD Transfer Pricing Guidelines Glossary

Operating Profits

The net income of a company after deducting direct and indirect expenses but before deductions for interest and taxes.

source: 2017 UN Transfer Pricing Manual Glossary

Passive Association

Benefits to members of an MNE group may arise as a result of an associated entity’s membership of the MNE group. Such benefits are attributable to the entity’s passive association with the MNE group and are not normally a chargeable service for members of the MNE group. 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.

source: 2017 UN Transfer Pricing Manual Glossary

Platform Contribution Transaction (U.S. Perspective)

A payment is required for the contribution by a party of any resource, capability, or right to the CSA if it is reasonably anticipated to contribute to the development of the cost shared intangibles. Any such contribution is a “platform contribution transaction” or a PCT, and the related payment is a PCT payment.

source: U.S. IRS Internal Practice Unit for Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA) – Initial Transaction.

Primary Adjustment

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.

source: OECD Transfer Pricing Guidelines Glossary

Profit Level Indicator (PLI)

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.

source: 2017 UN Transfer Pricing Manual Glossary

Profit Split Method

A transactional profit method that identifies the combined profit 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 I) and then splits those profits between the associated enterprises based upon an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length.

source: OECD Transfer Pricing Guidelines Glossary

Related Parties

Related parties are entities under common management, control or ownership, or where one entity controls the other entity.

source: 2017 UN Transfer Pricing Manual Glossary

Resale Price Margin

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.

source: OECD Transfer Pricing Guidelines Glossary

Resale Price Method (RPM)

The Resale Price Method (RPM) is a specified transfer pricing method under Treas. Reg. 1.482-3(c). RPM evaluates whether a transfer price charged in a controlled transaction is arm’s length by comparing the gross profit margin realized in a controlled transaction to gross profit margins observed in uncontrolled transactions. Gross profit margin is the ratio of gross profit to net sales revenue. Gross profit is net sales revenue less cost of goods sold (COGS). When employed, RPM is ordinarily used in cases involving subsidiaries that are wholesale or resale distributors.

source: IRS International Practice Unit ISI/9422.07_08(2013)

Research and Development (R&D) Risk

The risk of unsuccessful R&D spending. Risk may include failure to produce new product, product improvement or design, intangible asset, etc. which assist the company in increasing profits.

source: U.S. IRS Internal Practice Unit for Comparability Analysis for Tangible Goods Transactions - Inbound

Residual Analysis

An analysis used in the profit split method which divides the combined profit from the controlled transactions under examination in two stages. In the first stage, each participant is allocated sufficient profit to provide it with a basic return appropriate for the type of transactions in which it is engaged. Ordinarily this basic return would be determined by reference to the market returns achieved for similar types of transactions by independent enterprises. Thus, the basic return would generally not account for the return that would be generated by any unique and valuable assets possessed by the participants. In the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances that might indicate how this residual would have been divided between independent enterprises.

source: OECD Transfer Pricing Guidelines Glossary

Residual Profit Split

Under a residual profit split analysis the combined profits from the controlled transactions are allocated between the associated enterprises based on a two step approach. In the first step sufficient profit is allocated to each enterprise to provide basic arm’s length compensation for routine contributions. in the second step, the residual profit is allocated between the enterprises based on the facts and circumstances.

source: 2017 UN Transfer Pricing Manual Glossary

Roll-back

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.

source: 2017 UN Transfer Pricing Manual Glossary

Routine Contributions

Routine contributions are contributions of the same or a similar kind made by uncontrolled taxpayers involved in a similar business activity for which it is possible to identify market returns. Examples include contributions of tangible property, services and intangibles sufficiently similar to those owned by uncontrolled taxpayers engaged in similar activities where the value of the contribution can be reliably established.

source: U.S. IRS Internal Practice Unit for Residual Profit Split Method – Outbound.

Rulings

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.

source: 2017 UN Transfer Pricing Manual Glossary

Secondary Adjustment

An adjustment that arises from imposing tax on a secondary transaction.

source: OECD Transfer Pricing Guidelines Glossary

Secondary Transaction

A constructive transaction that some countries 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.

source: OECD Transfer Pricing Guidelines Glossary

Shareholder Activity

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.

source: OECD Transfer Pricing Guidelines Glossary

Shareholder Activity (U.S. Perspective)

An activity that has the sole effect to either:

• Protect the renderer’s capital investment in the recipient or in other members of the controlled group and/or
• Facilitate compliance by the renderer with reporting, legal, or regulatory requirements that apply to the renderer

These activities are not considered to provide a benefit to the recipient.

source: U.S. IRS Internal Practice Unit for Foreign Shareholder Activities and Duplicative Services.

Shifting of Profits

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.

source: 2017 UN Transfer Pricing Manual Glossary

Simultaneous Tax Examinations

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".

source: OECD Transfer Pricing Guidelines Glossary

Sixth Method

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.

source: 2017 UN Transfer Pricing Manual Glossary

Tested Party

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.

source: 2017 UN Transfer Pricing Manual Glossary

Trade Intangible

A commercial intangible other than a marketing intangible.

source: OECD Transfer Pricing Guidelines Glossary

Traditional Transaction Methods

The comparable uncontrolled price method, the resale price method, and the cost plus method.

source: OECD Transfer Pricing Guidelines Glossary

Transactional Net Margin Method

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

source: OECD Transfer Pricing Guidelines Glossary

Transactional Profit Method

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.

source: OECD Transfer Pricing Guidelines Glossary

Transfer Pricing

The general term for the pricing of cross-border, intragroup transactions in goods, intangibles or services.

source: 2017 UN Transfer Pricing Manual Glossary

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.

source: 2017 UN Transfer Pricing Manual Glossary

Transfer Pricing Method

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 (CUP) method, resale price method, cost plus method, transactional net margin method and profit split method. Other appropriate methods are also used in some jurisdictions.

source: 2017 UN Transfer Pricing Manual Glossary

Transfer Pricing Safe Harbours

‘Safe Harbours’ refer to a variety of possible legislative or regulatory approaches for simplifying taxpayer compliance with and tax authority administration of transfer pricing rules.

source: Patricia Lewis, November 30, 2012, “Safe at Last? Transfer Pricing Safe Harbours on the Horizon”, International Law Office

Uncontrolled Transactions

Transactions between enterprises that are independent enterprises with respect to each other.

source: OECD Transfer Pricing Guidelines Glossary