Introduction to the Law of Double Taxation Conventions

S. 11012. The arm’s length principle of Art. 9 OECD Model

464

Multinational enterprises with affiliates in different tax jurisdictions face the challenge of determining a price for transactions effectuated within their groups of companies, which is called the transfer price. Transfer price does not result from supply and demand in an open market and is established by the group. The determination of transfer price influences the assessment of the single entities’ profitability and related accounting issues as well as the taxable profit of each company in the respective jurisdiction. Particularly, by over- or underpricing intercompany transactions, the group can shift profits to low-tax jurisdictions and thereby minimize the overall tax burden of the group. Therefore, a specific set of tax rules (i.e. transfer pricing rules) exist in many countries to determine transfer prices in a proper way. Such rules apply to all intra-group transactions. For multinational enterprises as well as for tax authorities, the issue of transfer pricing is of utmost importance, especially in light of global tax planning.

465

Art. 9(1) OECD Model is the basis for DTC provisions relating to transfer pricing, providing tha...