APA (Advance Pricing Agreement)
An agreement between a tax authority and an MNE about the determination of the appropriate transfer pricing method to be used for pricing intercompany transactions. APAs may be unilateral, bilateral (two governments) or multilateral (three or more governments).
Arm’s Length Principle
The standard adopted by the OECD that transactions between members of an MNE should reflect conditions that would be made between independent enterprises.
CFC (Controlled Foreign Corporation)
A subsidiary and member of an MNE group.
CPM (Comparable Profits Method)
Under the Comparable Profits Method of Income Tax Regulations Section 1.482-5, an arm’s length result is determined by comparing the operating profit of the "tested" party with the operating profit of an uncontrolled party involved in comparable transactions. Thus, the CPM looks at profits rather than transactions. Generally, the tested party’s profit is measured in terms of PLIs such as rate of return on capital employed or the ratio of gross profit to operating expenses. The regulations state that the tested party should normally be the "least complex" of the controlled entities. Income Tax Regs. § 1.482-5(b)(2).
CSA (Cost Sharing Arrangements)
CUP (Comparable Uncontrolled Price)
A transfer pricing method that compares the price for property or services in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.
ETR (Effective Tax Rate)
EU (European Union)
The European Union, currently consisting of 27 member states.
EUJTPF (EU Joint Transfer Pricing Forum)
The EU Joint Transfer Pricing Forum, consisting of representatives of governments and the private sector who advise and consult on transfer pricing issues.
FTE (Full Time Equivalent)
Used in this survey to indicate the number of resources employed by tax authorities to undertake transfer pricing reviews in their jurisdiction.
GAAP (Generally Accepted Accounting Principles)
MNE (Multinational Enterprise)
A member of a related group that carries on business directly or indirectly in two or more countries.
MAP (Mutual Agreement Procedure)
A dispute resolution process found in Article 25 of the OECD Model Tax Convention. MAP is a government-togovernment process of negotiation to resolve matters of taxation not in accordance with the particular tax treaty and to attempt to avoid double taxation.
OECD (Organisation for Economic Co-operation and Development)
An intergovernmental organization, based in Paris, formed to foster international trade and economic development. The OECD has 30 member states. Among its many concerns is the removal of tax barriers to the free flow of goods and services and the avoidance of double taxation of income or profits. The OECD has developed guidelines and a model tax convention, see below.
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published by the OECD between 1995 and 1998. The OECD Guidelines endorse the arm’s length principle and consist of a statement of principle rather than a set of specific rules to be applied.
OECD Model Tax Convention
Model Tax Convention on Income and Capital, last published by the OECD in July 2005. The Model Tax Convention is to be used by member states in negotiations of bilateral double tax treaties. The OECD also provides commentary on the interpretation of the Model Tax Convention and states that member countries should follow this commentary, subject to their expressed reservations thereon, when applying and interpreting their double tax treaties.
MoU (Memorandum of Understanding)
PLI (Profit Level Indicators)
Ratios that measure the relationship between an entity’s profit and the resources invested or costs incurred to achieve those profits. Refer above to CPM for further discussion of their application.
PATA (Pacific Association of Tax Administrators)
An association of the tax administrations of Australia, Canada, Japan and the United States formed to foster cooperation between and the exchange of information among them. PATA has published guidance on APAs, MAPs and documentation requirements.
QCSA (Qualified Cost Sharing Arrangements)
TNMM (Transactional Net Margin Method)
The transactional net margin method is a profits-based method that compares the profitability of an MNE member to the profits of comparable entities undertaking similar transactions. The CPM in the United States is similar to TNMM.