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HMRC internal manual

International Manual

Transfer pricing: operational guidance: examining transfer pricing reports: OECD methodologies

A large proportion of any report will typically be taken up by a general review of the various methodologies as set out in the OECD Transfer Pricing Guidelines. It should explain how the methodologies in the Guidelines have been selected or rejected, and applied to the transactions carried out by the company, and these parts of the report should be scrutinised very carefully. Are the assumptions and conclusions reasonable ones?

A report may first divide transactions with affiliates into broad types - distribution to third parties of goods purchased from affiliates, distribution of own manufactured goods to affiliates, etc. It may then consider those transactions in the light of the various OECD methodologies. Looking at groups of similar transactions - transactions in aggregate - is appropriate if at arm’s length a trader would do the same. As the OECD Guidelines recognise at paragraph 3.9, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. The OECD cites examples, including some long-term contracts for the supply of commodities or services, and the pricing of a range of closely-linked products (e.g. in a product line) where it is impractical to determine pricing for each individual product or transaction.

Businesses tend to negotiate a price and then use that price until something happens which means it has to be changed. They may also accept some form of basket pricing, which essentially reflects the pragmatic proposition that if a range of products is being sourced from a single supplier, only the overall price matters, not the price for individual products.

Hence, a business may negotiate one composite price for a number of goods.

Cases where basket pricing has been applied to both sales and purchases between the same pair of entities should be approached with caution: independent companies might possibly accept this but each would want to be sure they benefited appropriately. Consider how to check that the appropriate arm’s length reward accrues to each party.

Further concerns which might arise from affiliates adopting set-off pricing are considered at INTM421100.

The various OECD methodologies and their application are discussed at INTM421000 onwards. The following pages of this chapter discuss some of the features that may be found in a report which concern OECD methodologies. Any attempt to apply the OECD methodologies should depend on the full facts and circumstances of the case.