Transfer Pricing

The OECD has an ongoing dialogue to develop a consensus among member countries to apply the arm's-length standard to determine the business profits earned by a permanent establishment taxable by a host jurisdiction. Despite the shortcomings of the 2004 Discussion Draft, application of the arm's-length standard to branch profits determinations should result in more reasonable determinations of the permanent establishment's business profits as a distinct and separate enterprise within the meaning of Article 7(2). The P.E.'s gross revenues should consist of its sales in country and the fair market value of finished goods transferred to the home office for sale outside the host jurisdiction. The P.E.'s cost of goods sold should include the fair market value of inventory received from the home office. The P.E. should be allowed to recognize a notional royalty expense if supported by the functional and factual analysis.