The OECD recently released a proposed revision of chapters I-III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The proposed changes represent a key step in implementing OECD projects on comparability and transactional profit methods, two areas considered a priority by the OECD Committee on Fiscal Affairs.
In particular, the proposed revision reflects the outcome of extensive consultation by the OECD with the business community around the May 2006 discussion draft on the theoretical foundations of comparability analysis and the January 2008 discussion draft on the transactional profit methods. Given that the existing guidance on these aspects dates back to 1995, the proposed update represents an effort by the OECD to align the principles laid out in the Transfer Pricing Guidelines with the practical considerations of tax administrations and the business community.
This important OECD update focuses on the hierarchy of transfer pricing methods, comparability analysis, and application of the transactional profit methods. Of special interest for the Pharmaceutical and Life Sciences industry relates to the split of combined profit whereby a new approach suggests to split transactional profit based on the division of profits resulting from comparable uncontrolled transactions (such as joint-venture agreements --collaborations, co-marketing or co-promotion agreements-- between unrelated parties under which profits are shared)