Latest Updates to the OECD Transfer Pricing Guidelines

On 20 January 2022 the Organisation for Economic Co-operation and Development (OECD) issued the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 (Guidelines). These guidelines are the latest instalment of the growing body of guidance issued under Action 13 of the OECD’s Base Erosion and Profit Shifting (BEPS) project, which provide updated guidance on the application of the transactional split method approach tax administrations should take for hard to value intangibles (HTVI), and transfer pricing in financial transactions.

3 Feb 2022 5 min read Tax & Exchange Control Alert Article

Today’s globalised economy means cross-border transactions are inevitable. Where the cross-border transactions are within a single group of companies, ordinary market forces are not necessarily decisive of the price charged between such related parties. Leaving scope for companies to use this flexibility in pricing to reduce the effective tax burden of the group. This is achieved through various methods, including structuring intragroup transactions so that the companies in comparatively high tax jurisdictions pay amounts to companies in jurisdictions with lower rates.

The flexibility in the prices set on intragroup transactions within multinational enterprises (MNEs) leads to a tension with the rights of states to tax gains from economic activity that is carried out within their jurisdictions.

States have resolved this tension through transfer pricing rules. These rules take various forms in different jurisdictions, but generally deem the price of a given transaction will, for tax purposes, be an arm’s length price.

Various methodologies can be applied in determining the arm’s length price of a given transaction. The Guidelines extrapolate on the various methodologies for determining an arm’s length price and the factual scenarios in which a particular method would be most appropriate.

The previous version of the Guidelines was published in 2017, and the present version consolidates the various guidance reports issued by the OECD on transfer pricing since the 2017 edition. The text of these reports had already authoritatively replaced the 2017 version at the time of publication. The three reports that comprise the basis for the updated Guidelines are the:

  • Revised Guidance on the Application of the Transactional Profit Split Method - BEPS Action 10. Published on 21 June 2018 and incorporated into Chapter II, Part III, Section C and Annexes II and III to Chapter II of the Guidelines;
  • Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles - BEPS Action 8. Published on 21 June 2018 and incorporated as Annex II to Chapter VI of the Guidelines; and
  • Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10. Published on 11 February 2020 and incorporated into Chapter 1, Section D and Chapter X of the Guidelines.

Transactional profit split method

The Transactional Profit Split (TPS) method entails identifying the profits which arise from a given transaction and then applying an economically appropriate split between the parties to approximate the division of profits that would have been accepted by parties dealing at arm’s length.

The Guidelines contain further specifics on circumstances under which the TPS method is the most appropriate. They indicate the TPS method will generally be appropriate in the following scenarios:

  • where the parties are making unique and valuable contributions under the intragroup transaction, as there will not likely be comparable transactions as the contributions are unique;
  • where the business operations of the transacting parties are highly integrated, because in such instances the value created and to be apportioned is dependent on the existence of the integration; and
  • where the parties share the economically significant risks in a transaction, such that each party can expect a share of profits, the risks may not be susceptible to reliable separation for each party making the TPS method most appropriate.

The Guidelines now also clarify that the absence of comparable transactions does not necessarily mean that the TPS method is the most appropriate. While where comparable transactions are available the TPS is unlikely to be the most appropriate.

It also provides further guidance on how to apply the TPS, by expanding on how to determine the level of profits available from a given transaction and the appropriate criteria for allocation of profits between the parties given their contributions and risk assumed. The central tenant of these areas of guidance remains that the profit determination and split must be done based on reliable predictions of the economic outcome which could reasonably be anticipated by each party to the transaction given the levels of contribution and risk, were the contribution made and risk undertaken at an arm’s length.

Guidance for tax administrations on hard-to-value intangibles

The updates here provide guidance for tax administrations to ensure that the HTVI methodology is applied consistently, and risk of economic double taxation is minimised. It also covers the interaction between HTVI and mutual agreement procedure under applicable tax treaties.

The HTVI principles in the Guidelines centre on the information asymmetry between tax administrations and parties to intragroup transactions and seek to rectify outcomes where this information asymmetry operated unreasonably in favour of the taxpayers.

The HTVI approach to transfer pricing entails that where the actual profits and risks in a transaction turn out to be significantly lower or higher than anticipated by the transacting parties in their transfer pricing filings, that tax administrations are entitled to use the disparity of the facts which have occured and predictive assertions by the taxpayers as a basis to adjust the transfer pricing treatment of a past transaction. This is based on the fact that taxpayers have more information at their disposal to accurately predict the risk and returns from a given transaction, while tax administrations must rely on what is presented by taxpayers.

The Guidelines emphasise that the basis for HTVI adjustments must be balanced with taxpayers’ need for certainty. Therefore, HTVI adjustments are to be made only on the basis of information or factors that reasonably could have been known by the parties to the transaction and therefore factored into the arm’s length price declared.

The bulk of the update to the Guidelines regarding HTVI consists of examples of the application of HTVI adjustments and the factors to be considered by tax administrations.

Transfer pricing in financial transactions

The newest aspect contained in the Guidelines are the portions on financial transactions. This guidance aims to equip stakeholders to appropriately assess the economic factors involved in intragroup financial transactions and how this translates into the application of the arm’s length principle.

The guidance is divided into two major portions. First, the application of general transfer pricing principles contained in Chapter 1 of the Guidelines to financial transactions, including how to conduct the accurate delineation analysis of the capital structure of MNE groups, and economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions.

The second major portion of guidance is on specific issues to be considered in applying the arm’s length principle to determine an appropriate price for financial transactions within MNE groups. The specific types of transactions covered include treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance.


Updated guidance on the application of transfer pricing methodologies is welcome for taxpayers, as it provides them with a greater understanding of the factors to be considered in compiling transfer pricing documentation which meets the requirements of tax administrations. Resulting in greater certainty for taxpayers that form part of MNEs, regarding the appropriateness of their own tax treatment of their intragroup transactions and anticipated position of the tax administrations involved.

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