Introduction to the Law of Double Taxation Conventions

S. 14612 The arm’s length principle of Art. 9 OECD Model

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Multinational enterprises with affiliates in different tax jurisdictions face the challenge of determining a price for transactions effectuated within their groups of companies. Since the price cannot result from supply and demand in an open market, a transfer price has to be established. Besides economic reasons – the assessment of the single entities’ profitability and related accounting issues – a transfer price is charged in order to determine the taxable profit of each company in an adequate way. Therefore, for multinational enterprises as well as for tax authorities, the issue of transfer pricing is of utmost importance, especially in the light of global tax planning; by over- or underpricing intercompany transactions, the profits within the group can be shifted to low-tax jurisdictions and the overall tax burden of the multinational can thereby be minimized.

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Art. 9(1) OECD Model is the basis for DTC provisions relating to transfer pricing: “Where an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or the same persons pa...