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Transfer pricing risk assessment: OECD handbook

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No country has the enforcement resources required to perform a thorough audit of every possible transfer pricing issue, the OECD has noted in the introduction to a draft Handbook on Transfer Pricing Risk Assessment, published on 30 April.

“As a result, decisions need to be made about how to most effectively deploy the available enforcement resources. Resource allocation ultimately requires an effective means to strategically select the cases that should be audited,” the OECD said.

The draft handbook, produced by the steering committee of the OECD Global Forum on Transfer Pricing, sets out the steps countries can take to assess the transfer pricing risk presented by an individual taxpayer’s operations. It is intended to serve as a manual for developing and developed countries to using conducting risk assessments.

The ‘enhanced engagement approach’

The OECD noted that because of the degree of judgment involved in establishing appropriate arm’s-length prices, it may be sensible for the taxpayer and the tax administration to discuss transfer pricing issues before a tax return is made or even before a transaction takes place.

Several countries including the UK, the Netherlands and the US, have adopted programs intended to increase “real time engagement” with taxpayers.

In the UK, legal certainty on the transfer pricing aspect of the transaction prior to submission of the tax return is only available under the statutory Advance Pricing Agreement process. But HMRC also operates a “real time working” procedure for discussion of the likely tax treatment of specific transactions prior to submission of the return.

The OECD said: “Under this procedure an indication may be given, expressed in terms of the level of risk, of how HMRC might see the tax risk relating to particular transactions, without leaving any inference that any particular price for goods and services used for calculating profits in a tax return will automatically be considered to be an appropriate transfer price.”

Interested parties are invited to comment on the draft handbook by 13 September.