Transfer Pricing Flexibility

Transfer pricing involves setting the prices of products or services exchanged between an MNE’s divisions situated in foreign tax jurisdictions. The prices should be at arm’s length, which means the MNEs need to treat these transactions between their associated enterprises the same way they would between unrelated companies in the comparable circumstances.

MNEs are required to choose the most appropriate transfer pricing method to prove that the transactions are priced at arm’s length. The OECD Guidelines prescribe five transfer pricing methods grouped under two categories: Traditional Transaction Methods and Transactional Profit methods. Transfer pricing consultants can help you determine which of the five methods are appropriate for your business transactions.

However, one pertinent question remains: Are MNEs free to use any other transfer pricing method which is not listed in the OECD Guidelines? Read ahead to know the answer to this question:

What are the OECD-recommended Methods?

Before moving on to the question of whether it is okay to use transfer-pricing methods not recommended in the OECD guidelines, it makes sense to get introduced to the transfer-pricing methods described in the OECD Guidelines. They are listed below:

  1. Traditional Transaction Methods: Comparable uncontrolled price (CUP) method, Resale price method, and Cost plus method
  2. Transactional Profit Methods: Transactional net margin method and Transactional profit method

Can MNEs use other Transfer Pricing Methods?

OECD calls any method that is not in its Guidelines as “Other Methods”. MNE Groups are free to use other methods to establish prices provided those prices satisfy the arm’s length principle in accordance with these Guidelines. It is advisable to consult with providers of transfer pricing services in Dubai before considering other methods.

Can MNEs substitute other methods for the five methods?

The OECD states that it is permissible to use a method not recognized in its guidelines. However, there is a catch: Other methods should not be used in substitution for OECD-recognised methods where the latter are more appropriate to the facts and circumstances of the case.

Justification for Using Other TP Methods

If a situation emerges where an MNE Group finds it necessary to use other methods, such a selection should be supported by an explanation of why OECD-recognised methods were regarded as less appropriate or non-workable in the circumstances of the case. The MNE group should also explain the reason why the selected other method was regarded as providing a better solution.

Moreover, the taxpayer should maintain and be prepared to provide documentation regarding how its transfer prices were established. Transfer pricing consultants in Dubai can help you prepare the supporting documents to justify the selection of other transfer pricing methods. However, the tax authority may disregard the other method used which is not in OECD, in absence of proper supporting documents or the tax authority themselves scrutinize the most appropriate method as prescribed by OECD.

Avail of the Best Transfer Pricing Services in Dubai, UAE

Even though MNE groups are allowed to choose transfer pricing methods not described in the OECD Guidelines, they should do so only if the other methods provide a better solution than the OECD-recognized methods. Moreover, such a selection should be supported with adequate explanation and documentation. This is a grey area where the services of transfer pricing advisers in Dubai such as Tax Gian can make a positive difference.

Tax Gian is one of the leading providers of transfer pricing services in Dubai, composed of a team of highly qualified tax experts.  We are a brand of Jitendra Tax Consultants (JTC), which has been providing robust tax solutions for over two decades. Tax Gian’s corporate tax professionals can guide you through complex areas of international tax to mitigate the risk of non-compliance.

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