OECD Transfer Pricing Guidelines for multinationals 2022



On January 20, 2022, the OECD published the revised transfer pricing guidelines for multinational enterprises and tax administrations. The guidelines remain largely the same compared to the 2017 version, but also contain some important clarifications. The guidelines include the guidelines on financial transactions we discussed in an earlier alert. Additionally, guidance on the profit split method and hard-to-value intangibles was added. In this Dentons Tax Alert we provide you with a bird’s eye view to put the guidelines into perspective by discussing what’s new and how we can help your organization.

Guidance on the profit split method

What’s new?

The guidelines provide more clarity on the profit split method. The profit split method is not always the most appropriate transfer pricing method. The guidelines now contain hallmarks to help companies determine when the profit split may be the most appropriate method. These hallmarks are:

  • Unique and valuable contributions by each of the parties to the transaction
  • Highly integrated business operations
  • Shared assumption of economically significant risks or separate assumption of closely related risks.

According to the updated guidelines, presence of reliable comparables for a transaction make it unlikely that the profit split method is the most appropriate transfer pricing method. However, absence of comparables should not automatically result in the profit split being the most appropriate method. The guidelines emphasize this heavily, as the first 10 out of 16 total examples attached in the annex illustrate where the profit split either is or is not the most appropriate method to determine a correct remuneration.

When the profit split method should be applied, the guidelines now also provide clarity on how to apply the method. The starting point is the functional analysis. The profit split should be aligned with the functional analysis and delineated transactions - which are also determined in line with other parts of the guidelines. After that, the profits have to be aligned to match the appropriate accounting period for each of the parties involved. Lastly, it must be determined if the gross profits or operating profits have to be split. Gross profit may, for example, be more appropriate when operating costs differ for both parties or if they each fulfill their own activities in addition to the joint activity. The guidelines explicitly warn not to apply these tests with hindsight. The profit must be split based on information known or reasonably foreseeable at the time the transaction was entered into, as would be between unrelated parties.

With more clarity on which situations the profit split method is best suited for and how to determine the profit to be split, the last step is to actually determine how to split the profit. The guidelines mention a few factors that could be used like: assets of capital used, costs, incremental sales, number of employees or employee compensation. As long as they are objective, verifiable and can be supported with comparable data, any factor can be used to determine the split.

What’s next?

The inclusion of the guidance on the profit split method clarifies a lot, but practice is never as clear cut as the examples formulated by the OECD. The guidelines now offer useful information on when the profit split method may not be the most appropriate method. We suggest (re)assessing whether the profit split is the correct transfer pricing method for a transaction. Taxpayers can take solace in the message that tax authorities should not use the profit split method as a fallback in case no comparables exist.

Guidance for tax administrations on application of the approach to hard-to-value intangibles

What’s new?

The transfer pricing guidelines incorporated guidance for tax administrations on the application of the approach to hard-to-value intangibles (HTVI). The term HTVI is used for intangibles or rights in intangibles of which, at the time of their transfer between associated enterprises, no reliable comparable existed and, at the time the transactions was entered into, projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible were highly uncertain. This makes it difficult to predict the level of ultimate success and thus the expected profit of the intangible at the time of the transfer. An example of a HTVI is a patented pharmaceutical compound.

This guidance provides tax authorities the possibility to determine in which situations the pricing arrangements set by the taxpayers are at arm’s length - and are based on an appropriate weighting of the foreseeable developments or events that are relevant for the valuation of certain HTVI - and in which situations it is not the case.

Under the guidance, tax authorities are entitled to consider ex post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. The tax authorities are also entitled to consider any other relevant information related to the HTVI transaction that becomes available to the tax authorities and which could or should have been known to the affiliated enterprises when the transaction was entered into.

When the actual income or cash flows are significantly higher or lower than the anticipated income or cash flows on which the pricing was based, then there is presumptive evidence that the projected income or cash flows used in the original valuation should have been higher or lower, and that the probability-weighting of such an outcome requires further investigation. However, it would be incorrect to base the revised valuation on the actual income or cash flows without considering the probability at the time of the transaction, of the income or cash flows being achieved.

In applying the HTVI approach, tax authorities may make appropriate adjustments to the allocation of profits between affiliated enterprises. The tax authorities may also make adjustments that reflect an alternative pricing structure that differs from that adopted by the taxpayer but reflects one which would have been made by independent enterprises in comparable situations.

What’s next?

The transfer pricing guidelines provide opportunities for tax authorities to adjust existing transfer pricing arrangements with regard to HTVI based on information that was not available at the time of entering into the transfer pricing arrangements. Therefore, we advise to review your transfer pricing arrangements and (re)assess whether they are in line with the applicable guidelines.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:


Dentons on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.