2012 Transfer pricing global reference guide

Transfer pricing glossary of terms

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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 and in many jurisdictions, which mandates that the result related parties obtain from an intercompany transaction approximates the result that uncontrolled parties would have obtained had they undertaken the same transaction under the same circumstances.

CFC (controlled foreign corporation)
A subsidiary and member of an MNE group.

CPM (comparable profit method)
A method that, under US regulations, is used to determine an arm's length consideration for transfers of intangible property. If the reported operating income of the tested party is not within a certain range, an adjustment will be made. In effect, this method requires a comparison of the operating income that results from the consideration actually charged in a controlled transfer with the operating income of similar taxpayers that are uncontrolled.

CSA (cost sharing agreement) or CCA (cost contribution arrangement)
A framework agreed among enterprises to share the costs and risks of developing, producing or obtaining assets, services or rights and to determine the nature and extent of the interests of each participant in the result of the activity of developing, producing or obtaining those assets, services or rights.

CUP (comparable uncontrolled price)
A transfer pricing method that compares the price for property or services in a controlled transaction with the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.

ETR (effective tax rate)
The percentage obtained by dividing the taxpayer's tax liability by his total taxable income, which reflects the rate at which a taxpayer would be taxed if his tax liability were taxed at a constant rate rather than progressively.

EU (European Union)
The European Union, currently consisting of 27 member states.

EUJTPF (EU Joint Transfer Pricing Forum)
The EU Joint Transfer Pricing Forum consists 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 jurisdictions.

GAAP (Generally Accepted Accounting Principles)
The rules and practices required to be followed in certain jurisdictions in keeping financial records and books of account.

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, as well as in various double tax conventions. MAP is a government-to-government 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 34 member states. Among its many concerns are 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.

OECD Guidelines
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, the latest edition of which was published by the OECD in 2010. The OECD Guidelines endorse the arm's length principle and consist of a statement of principles 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 September 2010. 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.

PLI (profit level indicator)
Ratio that measures the relationship between an entity's profit and the resources invested or costs incurred to achieve that profit. 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 and the exchange of information among them. PATA has published guidance on APAs, MAPs and documentation requirements.

TNMM (transactional net margin method)
The transactional net margin method is a profits-based method that compares the profitability of an MNE member with the profits of comparable entities undertaking similar transactions. The CPM in the United States is similar to TNMM.



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