OECD - Transfer Pricing

• cross border tax situations involve issues related to jurisdiction, allocation of income and valuation.
  
  
  2. allocation of income
     MNEs may share common resources and overheads. These resources need to be allocated in an optimal manner.
     
     There sometimes tends to be a dispute between countries in the allocation of costs and resources owing to nation states wanting to maximise their own tax base.
     
     From the MNE perspective, any trade or taxation barriers in the countries in which it operates raise the MNE transaction costs while distorting the allocation of resources.
     
     Furthermore, many of the common resources which are a source of competitive advantage for the MNEs cannot be separated from the income of the MNE group members for tax purposes. This is especially true in the case of intangibles and service related intragroup transactions.
  3. valuation
     Mere allocation of income and expenses to one or more members of the MNE group may not be sufficient, the income and expenses must also be valued; a key issue of transfer pricing is therefore the valuation of intragroup transfers.
     
     With the MNE being an integrated structure with the ability to
     
     
     1. exploit international differentials
     2. utilise economies of integration and
     3. take advantage of economies of scale,
     not available to a standalone entity, transfer prices within the group are unlikely to be the same prices that unrelated parties would negotiate.