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HMRC internal manual

International Manual

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Transfer pricing: Methodologies: OECD Guidelines: Importance of Article 9 of OECD Guidelines

The Associated Enterprises Article

As far as transfer pricing is concerned, the general application of the arm’s length principle is stated in the Associated Enterprises Article of the OECD Model Tax Convention on Income and on Capital (‘MTC’). Article 9.1 states that:

Where

a. an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or   


b. the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,   

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

The existence of a tax treaty is not a prerequisite for the application of the UK’s transfer pricing legislation; indeed they are not necessary in the context of transactions involving affiliates in tax havens (with whom the UK tends not to have treaties). However, treaties will invariably contain an Associated Enterprises Article based on Article 9.1 of the OECD MTC.

Article 9.2 of the OECD MTC provides for a corresponding (downwards) adjustment to profits to be made in a counterparty’s jurisdiction where an upwards adjustment has been made under Article 9.1. This seeks to eliminate the double taxation that would otherwise arise. However not all tax treaties contain a provision based on Article 9.2 of the OECD MTC and in these cases double taxation is generally eliminated by other means - typically the Mutual Agreement Procedure (‘MAP’; see INTM423000 onwards) provided for by Article 25 of the OECD MTC.

The OECD Transfer Pricing Guidelines explain how to choose and apply the most appropriate transfer pricing methodology in any given case. The guidelines are discussed at INTM421010 onwards.