{"id":11104,"date":"2023-07-12T12:46:14","date_gmt":"2023-07-12T09:46:14","guid":{"rendered":"https:\/\/cabot-tp.ro\/?page_id=11104"},"modified":"2023-07-13T15:55:14","modified_gmt":"2023-07-13T12:55:14","slug":"what-are-the-transfer-prices","status":"publish","type":"page","link":"https:\/\/cabot-tp.ro\/en\/what-are-the-transfer-prices\/","title":{"rendered":"What are the Transfer Prices"},"content":{"rendered":"

[vc_row full_width=”stretch_row_content_no_spaces”][vc_column offset=”vc_hidden-xs”][vc_single_image image=”8279″ img_size=”2560×600″ alignment=”center”][\/vc_column][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_single_image image=”8279″ img_size=”800×400″ alignment=”center”][\/vc_column][\/vc_row][vc_row full_width=”stretch_row” css=”.vc_custom_1627457664363{padding-top: 30px !important;padding-bottom: 30px !important;background-color: #00ffbb !important;}”][vc_column][vc_column_text]<\/p>\n

What are the Transfer Prices<\/span><\/h2>\n

[\/vc_column_text][\/vc_column][\/vc_row][vc_row css=”.vc_custom_1627436488998{margin-bottom: 60px !important;padding-top: 60px !important;}”][vc_column offset=”vc_col-lg-9 vc_col-md-9″][vc_column_text css=”.vc_custom_1689252667469{margin-bottom: 34px !important;}”]<\/p>\n

We have tried to summarize in the following the main definitions, concepts, legislative provisions and case studies regarding transfer pricing.<\/p><\/blockquote>\n

[\/vc_column_text][vc_column_text css=”.vc_custom_1689252686833{border-top-width: 0px !important;border-top-style: solid !important;}”]Although the field of transfer pricing is characterized by subjectivity, not being an exact science, it is important to know the main legal provisions regarding transfer pricing in order to be able to apply them correctly in the operational activity and in the interactions with the tax authorities.<\/p>\n

Those who know the law enforcement in detail will correctly implement transfer pricing policies and survive tax audits.[\/vc_column_text]

<\/div>[vc_custom_heading stripe_pos=”hide” text=”The Concept of Transfer Pricing” font_container=”tag:h2|text_align:left|color:%23000000″ use_theme_fonts=”yes” el_class=”hide_indents” css=”.vc_custom_1689252700581{padding-bottom: 20px !important;}”][vc_column_text css=”.vc_custom_1689252840226{border-top-width: 0px !important;border-top-style: solid !important;}”]WHY CAN TRANSFER PRICING REPRESENT UNSAFE GROUND OR A RISK ZONE?<\/strong><\/p>\n

When related persons from different tax jurisdictions (from different countries, for example) carry out transactions with each other, the taxable base is reduced or increased by the respective expense or income, depending on the role fulfilled in the transaction (provider \/ seller or beneficiary \/ client).<\/p>\n

When the prices for these transactions do not respect the arm’s length<\/em> principle<\/strong> or the market value principle<\/strong>, the taxable base is, incorrectly, increased or decreased to the detriment of a taxing jurisdiction.<\/p>\n

The tax jurisdiction where the unjustified reduction of the taxable base took place can, through fiscal controls, additionally impose the part of income not initially included in the tax base. As a result, the company verified by the tax authorities will pay additional tax and accessories.<\/p>\n

The market value principle<\/strong> was introduced into Romanian tax legislation in 1994 and is applicable to all transactions with related parties, including those carried out between a foreign legal entity and its permanent establishment in Romania.<\/p>\n

Starting from 2010, transactions between Romanian affiliated entities also fall within the scope of the transfer pricing rules, specifying that previously only transactions between Romanian entities with non-resident affiliated persons could be verified by the tax authority.<\/p>\n

Regarding the documentation of transfer prices, although the principle of market value is present in the local tax legislation from 1994, much later – in 2008 – ANAF issued Order 222 \/ 2008 regarding the file of transfer prices. It is currently replaced by Order 442 \/ 2016 on the amount of transactions, deadlines for drawing up, content and conditions for requesting the transfer pricing file and the transfer pricing adjustment \/ estimation procedure<\/strong>.<\/p>\n

The country profile of Romania in terms of transfer prices can be consulted here<\/strong><\/a>.[\/vc_column_text][\/vc_column][vc_column width=”1\/4″ offset=”vc_hidden-sm vc_hidden-xs”][stm_sidebar sidebar=”1469″][\/vc_column][\/vc_row][vc_row full_width=”stretch_row” css=”.vc_custom_1627438469594{padding-top: 45px !important;padding-bottom: 60px !important;background-color: #f8faf9 !important;}”][vc_column width=”1\/2″][vc_custom_heading stripe_pos=”hide” text=”Defini\u021bii” font_container=”tag:h2|text_align:left|color:%23000000″ use_theme_fonts=”yes” el_class=”hide_indents” css=”.vc_custom_1627438615075{padding-bottom: 30px !important;}”][vc_tta_accordion shape=”square” color=”blue” c_position=”right” active_section=”100″ collapsible_all=”true”][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”1. Advance pricing arrangements (\u201cAPA\u201d)” tab_id=”1627440078686-c3dcd66c-2d08″][vc_column_text]An arrangement that determines, in advance of\u00a0controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the\u00a0transfer pricing\u00a0for those transactions over a fixed period of time.\u00a0 An advance pricing arrangement may be unilateral involving one tax administration and a taxpayer or multilateral involving the agreement of two or more tax administrations.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”2. Anti-abuse rules \/ anti-avoidance laws” tab_id=”1627440078777-22b046cd-1840″][vc_column_text]Domestic taxation laws that are intended to prevent taxpayers from avoiding tax or abusing tax laws for the sole purpose of obtaining a reduction, avoidance or deferral of tax.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”3. Arm\u2019s length principle” tab_id=”1627440078873-0ee6b752-a5d2″][vc_column_text]The international standard that OECD Member countries have agreed should be used for determining transfer prices for tax purposes. It is set forth in\u00a0Article 9\u00a0of the\u00a0OECD Model Tax Convention\u00a0as follows: where \u201cconditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between\u00a0independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.\u201d[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”4. Arm\u2019s length range” tab_id=”1627440079004-b12a3480-4bbf”][vc_column_text]A range of figures that are acceptable for establishing whether the conditions of a\u00a0controlled transaction\u00a0are arm\u2019s length and that are derived either from applying the same\u00a0transfer pricing method\u00a0to multiple comparable data or from applying different transfer pricing methods.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”5. Assessment \u2013 taxation by” tab_id=”1627440079121-a361139e-f05d”][vc_column_text]Taxation by means of either the tax authority or the taxpayer (\u201cself-assessment\u201d) computing tax due over a period, usually a calendar or fiscal year.\u00a0 In effect, the taxpayer pays tax on an income amount after the gross amount has been received, as compared to taxation by a final\u00a0withholding tax\u00a0where a tax amount is retained and forwarded to the tax authorities before a net amount (of dividends, for example) is paid to the taxpayer.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”6. Associated\/Related enterprises, companies, or parties” tab_id=”1627440079219-9b372e3b-9358″][vc_column_text]Two enterprises are associated enterprises with respect to each other if one of the enterprises meets the conditions of\u00a0Article 9, sub-paragraphs 1a) or 1b)\u00a0of the\u00a0OECD Model Tax Convention\u00a0with respect to the other enterprise. See\u00a0Article 3\u00a0for the definition of \u201centerprise\u201d.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”7. Comparability (analysis)” tab_id=”1627440079313-3c29158f-2d6a”][vc_column_text]A comparison of a\u00a0controlled transaction\u00a0with an\u00a0uncontrolled transaction\u00a0or transactions.
\nControlled and uncontrolled transactions are comparable if none of the differences between the transactions could materially affect the factor being examined in the methodology (e.g. price or margin), or if reasonably
\naccurate adjustments can be made to eliminate the material effects of any such differences.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”8. Compensating adjustment” tab_id=”1627440079411-ab3a5215-4494″][vc_column_text]An adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer\u2019s opinion, an\u00a0arm\u2019s length\u00a0price for a\u00a0controlled transaction, even though this price differs from the amount actually charged between the\u00a0associated enterprises. This adjustment would be made before the tax return is filed.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”9. Competent authority” tab_id=”1627440079506-0f43f1a4-7872″][vc_column_text]\u201cCompetent authority\u201d is a term used in tax conventions to identify the\u00a0person who represents the State in the implementation of the treaty, as defined under\u00a0Article 3\u00a0of a tax treaty.\u00a0 A sample clause might be:
\nThe term \u201ccompetent authority\u201d means, in the case of Utopia, the Commissioner of Taxation or an authorised representative of the Commissioner and, in the case of Ruritania, the Minister of Finance or an authorised representative of the Minister.
\nThe competent authority has certain specific functions under the treaty, including acting as a contact point for both taxpayers and the other competent authority in\u00a0Mutual Agreement Procedures.\u00a0 Sometimes there are different competent authorities for different functions under the treaty.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”10. Controlled transactions” tab_id=”1627440079594-973a7db7-bfef”][vc_column_text]Transactions between two enterprises that are\u00a0associated enterprises\u00a0with respect to each other.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”11. Correlative adjustment” tab_id=”1627440079701-5ba68aec-a2ad”][vc_column_text]A term used in the\u00a0transfer pricing\u00a0context.\u00a0 An adjustment that creates an increase or decrease in the tax imposed on one member of the group of controlled taxpayers correlating to the \u201cprimary adjustment\u201d made in respect of another member of the same group.\u00a0 The adjustment may be to the income of the group member or to an allowance of relief under a\u00a0foreign tax credit\u00a0or\u00a0exemption mechanism.\u00a0 This term is generally seen as interchangeable with the term \u201ccorresponding adjustment\u201d, although when speaking of a particular monetary adjustment, some prefer to refer to \u201ccorrelative adjustments\u201d.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”12. Corresponding adjustment” tab_id=”1627440079797-7e91b3b3-8fa9″][vc_column_text]An adjustment to the tax liability of the\u00a0associated enterprise\u00a0in a second tax jurisdiction made by the tax administration of that jurisdiction, corresponding to a\u00a0primary adjustment\u00a0made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”13. Economic double taxation” tab_id=”1627440079894-b3281969-104f”][vc_column_text]\u201cEconomic double taxation\u201d is where two different legal persons are taxed on the same income or other taxable item by more than one State. This may occur, for example where two States take different views of the profits made in transactions between a subsidiary resident in one of the States in its transactions with a parent company in the other State, so that at least some part of the profits on the transaction are taxed in both States.
\nThe\u00a0Model Tax Convention\u00a0does not often deal with economic double taxation, but\u00a0Article 9\u00a0seeks to address aspects of this sort of double taxation of related entities.\u00a0 As noted by the Commentary on\u00a0Article 10, at paragraph 40 certain States\u2019 domestic tax laws and treaty practice seek to avoid or mitigate economic double taxation caused by the simultaneous taxation of the company\u2019s profits at the level of the company and of the dividends at the level of the shareholder.\u00a0 Compare \u201cjuridical double taxation\u201d.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”14. Exemption Method” tab_id=”1627440080001-445da8a2-fd40″][vc_column_text]The method of relieving double taxation under\u00a0Article 23A of the OECD Model Tax Convention.
\nUnder this method, where a resident (\u201cR\u201d) of one of the treaty partner States receives an amount that may be taxed in the other treaty State (which we can call for these purposes the \u201csource State\u201d) under the tax treaty, the residence State must, when taxing R, exempt that amount from residence State taxation.\u00a0 In other words, R will not have to pay any tax to the residence State on the amount where the source State may levy tax under the treaty, whether or not it actually does so.\u00a0 This is the principle under\u00a0paragraph 1 of Article 23A.
\nParagraph 2\u00a0provides an exception, however in that where amounts are only liable to source State taxation to a limited extent under\u00a0Article 10 (Dividends)\u00a0or\u00a0Article 11 (Interest), the State of residence need only give a\u00a0credit, rather than an exemption in respect of that amount.\u00a0\u00a0Paragraph 4\u00a0provides an exception to the general exemptionprovision in paragraph 1.\u00a0 It provides that that obligation does not apply in certain circumstances where to apply it would result in double non-taxation as a result of different approaches to the application of the treaty which are both consistent with the meaning of the treaty.
\nThis system of tax exemption deals with avoidance of \u201cjuridical double taxation\u201d, where the person liable to the residence State taxation is\u00a0the same person liable to the source State taxation.
\nArticle 23A\u00a0does not provide for a \u201cfull exemption\u201d system, but is rather, an \u201cexemption with progression\u201d system (Paragraph 3).\u00a0 This means that although an amount which may be taxed in the source State is exempt in the residence State, the residence State is still allowed to take that amount into account when determining the amount of tax that the resident must pay on his or her other (that is, non-exempt) income.\u00a0 For example, the income may be taken into account as received in order to decide what marginal tax rate applies to the other income.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”15. Foreign Tax Credit” tab_id=”1627440080105-42f32067-ba10″][vc_column_text]A credit given for foreign tax in calculating the amount of tax to be paid in a person\u2019s\u00a0country of residence. In effect, a taxpayer need not pay residence country tax on the income where the source country of the income taxes that income to an equal or greater degree.\u00a0 Where the residence country tax is higher, the amount of foreign tax is deducted from the amount of local tax otherwise to be paid. This avoids double taxation\u00a0 where, as is often the case, a tax treaty allows both the\u00a0source\u00a0and\u00a0residence\u00a0country some taxing rights.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”16. Functional analysis” tab_id=”1627440080207-d6e26a4b-a644″][vc_column_text]An analysis of the functions performed (taking into account assets used and risks assumed) by\u00a0associated enterprises\u00a0in\u00a0controlled transactions\u00a0and by\u00a0independent enterprises\u00a0in comparable\u00a0uncontrolled transactions.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”17. Independent enterprises” tab_id=”1627440080313-87b73cf7-832e”][vc_column_text]Two enterprises are independent enterprises with respect to each other if they are not\u00a0associated enterprises\u00a0with respect to each other.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”18. Juridical double taxation” tab_id=”1627440080419-dca40093-4f08″][vc_column_text]\u201cJuridical double taxation\u201d occurs where the same legal person is taxed twice on the same income or other taxable item by more than one State. A common situation is where the source country taxes a payment as it flows to a person (by dividend or interest\u00a0withholding tax, for example, which is in effect a tax on the recipient collected by a withholding agent such as the company paying the dividend) and the residence state of the recipient also taxes that person on the same item as part of his or her worldwide income.\u00a0 The division of taxing rights in the\u00a0Model Tax Convention, when combined with the effect of Article 23 is designed to prevent such juridical double taxation as far as is possible.\u00a0 Compare \u201ceconomic double taxation\u201d.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”19. MAP” tab_id=”1627440080535-86afa499-6d3c”][vc_column_text]See\u00a0mutual agreement procedure.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”20. Multinational enterprise group (MNE group)” tab_id=”1627440080642-feeae92e-4b21″][vc_column_text]A group of\u00a0associated companies\u00a0with business establishments in two or more countries.[\/vc_column_text][\/vc_tta_section][\/vc_tta_accordion][\/vc_column][vc_column width=”1\/2″]

<\/div>[vc_tta_accordion shape=”square” color=”blue” c_position=”right” active_section=”100″ collapsible_all=”true”][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”21. Multinational enterprise (MNE)” tab_id=”1627440102034-5df1d86c-a4f0″][vc_column_text]A company that is part of an\u00a0MNE group.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”22. Mutual agreement procedure (MAP)” tab_id=”1627440102190-e981c9de-8929″][vc_column_text]A means through which\u00a0competent authorities\u00a0consult to resolve disputes regarding the application of double tax conventions.\u00a0 This procedure, which is described and authorized by\u00a0Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a\u00a0transfer pricing adjustment, but can also be relevant for other aspects of a tax treaty\u2019s operation.\u00a0 In the case of MAP relating to transactions between\u00a0associated enterprises, see also\u00a0Article 9, especially paragraph 2.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”23. OECD Model Tax Convention” tab_id=”1627440102371-5e9f4df7-f4ad”][vc_column_text]The Model Tax Convention on Income and Capital published by the OECD, as amended from time to time.\u00a0 The OECD Model Tax Convention includes Commentaries on the articles of the Model.\u00a0 The OECD Model Tax Convention serves as a model for the negotiation of bilateral tax treaties between countries.\u00a0 Copies are available for sale at the\u00a0OECD website<\/a>.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”24. OECD Transfer Pricing Guidelines” tab_id=”1627440102523-ebae0633-7abc”][vc_column_text]The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations first published by the OECD in 1995, as amended from time to time.\u00a0 The Guidelines provide guidance on the use of the\u00a0arm\u2019s length principle\u00a0to determine\u00a0transfer pricing\u00a0between\u00a0associated enterprises. Copies are available for sale at the\u00a0OECD website<\/a>.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”25. Permanent establishment (\u201cPE\u201d)” tab_id=”1627440102684-3e43ea34-d13a”][vc_column_text]Term given definition by\u00a0Article 5 of the OECD Model Tax Convention, and used to determine whether the business profits\u00a0of a resident enterprise [H\/L] of the treaty partner may be taxed under\u00a0Article 7\u00a0in the other treaty partner.\u00a0 As Article 7 makes clear, the amount of business profits so taxable, is the amount attributable under that Article to the permanent establishment. The PE test is broadly a test of whether there is the minimum economic connection necessary to justify\u00a0source State taxation\u00a0of such business profits under the tax treaty.
\nThere are generally two aspects required for there to be a PE, a relationship to a particular place (the geographical aspect) and a presence for a particular point of time (the temporal aspect).\u00a0 There are, however, special rules for some types of PEs under the OECD Model Tax Convention, such as \u201cconstruction\u201d PEs, where the temporal period required is more than 12 months, and certain PEs constituted by \u201cdependent agent\u201d\u00a0arrangements, where no time period applies.\u00a0 There are also some exclusions under the OECD Model Tax Convention, presences which are specifically stated not to be PEs, such as activities related solely to storage, display or delivery of goods or merchandise or other so-called \u201cpreparatory or auxiliary activities\u201d.
\nSometimes the term \u201cpermanent establishment\u201d is used in domestic tax legislation as well, but it may not have exactly the same meaning as in the tax treaties.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”26. Primary adjustment” tab_id=”1627440102848-cbec9993-0697″][vc_column_text]An adjustment that a tax administration in a first jurisdiction makes to a company\u2019s taxable profits as a result of applying the\u00a0arm\u2019s length principle\u00a0to transactions involving an\u00a0associated enterprise\u00a0in a second tax jurisdiction.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”27. Repatriation of funds” tab_id=”1627440103016-16951375-8d43″][vc_column_text]In the\u00a0transfer pricing\u00a0context, this term refers to the act by which an enterprise that has been party to a\u00a0controlled transaction\u00a0with an\u00a0associated enterprise\u00a0and has been found, in accordance with a\u00a0transfer pricing adjustment, to have derived\u00a0as a result of that transaction an amount of income that exceeds an\u00a0arm\u2019s length\u00a0amount, returns the excess funds to its associated enterprise.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”28. Residence State” tab_id=”1627440103179-7959cbff-b740″][vc_column_text]The residence State is the country where a person is\u00a0resident under the treaty at the relevant time.\u00a0\u00a0 In international tax law, this is a basis for taxation of the global income of the resident.\u00a0 See the text of\u00a0Article 4, and its\u00a0explanation, for more on treaty residence.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”29. Secondary adjustment” tab_id=”1627440103345-1b17b59d-8abc”][vc_column_text]An adjustment that arises from imposing tax on a\u00a0secondary transaction\u00a0in\u00a0transfer pricing\u00a0cases.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”30. Secondary transaction” tab_id=”1627440103570-f9a2db1b-f7c1″][vc_column_text]A constructive (that is, notional) transaction that some States assert under their domestic\u00a0transfer pricing\u00a0legislation after having proposed a\u00a0primary adjustment\u00a0in order to make the actual allocation of profits consistent with the primary adjustment.\u00a0 Secondary transactions may take the form of constructive dividends (that is items treated as though they are dividends, even though they would not normally be regarded as such), constructive equity contributions, or constructive loans.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”31. Simultaneous tax examinations” tab_id=”1627440103731-02137eaa-3adc”][vc_column_text]A simultaneous tax examination, as defined in Part A of the\u00a0OECD Model Agreement for the Undertaking of Simultaneous Tax Examinations, means an \u201carrangement between two or more parties to examine simultaneously and independently, each on its own territory, the tax affairs of (a) taxpayer(s) in which they have a common or related interest with a view to exchanging any relevant information which they so obtain\u201d.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”32. Source State” tab_id=”1627440103903-3c16f49c-3ea0″][vc_column_text]The State where, for the purposes of a treaty, a taxable amount is regarded as arising.\u00a0 As rules in domestic law about where an amount arises differ (e.g. some might look to where the profits that become a dividend are made as the source of a dividend, whereas others may look to the State from which\u00a0the dividend is paid, the\u00a0Model Tax Convention\u00a0often provides implied or specific rules.
\nFor example, a State A \u2013 State B tax treaty, if it was based on the OECD Model Tax Convention, would allow State B as the source State to impose a limited\u00a0withholding tax\u00a0on dividends paid by corporations resident in State B to residents of State A (see\u00a0Article 10), but would prohibit State B from imposing a tax on dividends paid to a resident of State A by a corporation resident in State C, even if those dividends were paid out of profits earned by the corporation in State B (see\u00a0Article 21).
\nSource States may, under general international tax law, tax income sourced in that State.\u00a0 The\u00a0residence State\u00a0may then\u00a0provide an\u00a0exemption\u00a0or a\u00a0credit\u00a0for tax paid in the source State under domestic law.\u00a0 A tax treaty often limits or prevents\u00a0source State taxation, and also generally provides that the residence State\u00a0must give a credit or exemption for tax paid in the source State under\u00a0Article 23.\u00a0 Compare \u201cresidence State\u201d.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”33. Source Taxation” tab_id=”1627440104077-05b8dd68-67d8″][vc_column_text]Tax on an item of income imposed in the State wherein that income is derived, or tax on an item of capital imposed in the State wherein that capital is situated. Many Articles of the\u00a0Model Convention\u00a0provide for an exemption from, or a reduction of, such\u00a0\u201csource\u201d tax\u00a0on certain items of income or capital.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”34. Tested party” tab_id=”1627440104252-357b1c0b-9141″][vc_column_text]The participants in a\u00a0controlled transaction\u00a0that is the party by reference to whom a particular\u00a0transfer pricing method\u00a0is applied.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”35. Transfer pricing” tab_id=”1627440104428-4cf0f581-83b1″][vc_column_text]The terms and conditions applying in transactions between\u00a0associated enterprises.[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”36. Transfer pricing adjustment” tab_id=”1627440104605-3a453237-58ca”][vc_column_text]An adjustment to the\u00a0 tax liability of an enterprise when a tax jurisdiction applies the\u00a0arm\u2019s length principle\u00a0to transactions between\u00a0associated enterprises\u00a0in a\u00a0transfer pricing\u00a0case.\u00a0 See \u201cprimary adjustment\u201d (by the initial tax jurisdiction), \u201ccorresponding adjustment\u201d (by the jurisdiction of the other associated enterprise)\u00a0 and \u201ccompensating adjustment\u201d (reported by the taxpayer based on the arm\u2019s length principle though it differs from the actual terms and conditions of the transaction).\u00a0 See also a \u201csecondary adjustment\u201d (an adjustment arising from taxing certain notional transactions).[\/vc_column_text][\/vc_tta_section][vc_tta_section i_icon_fontawesome=”fas fa-angle-right” add_icon=”true” title=”37. Transfer Pricing methodologies” tab_id=”1627440104775-1e79b9bb-5886″][vc_column_text]The methods used to make\u00a0transfer pricing adjustments.\u00a0 The following is a list of methods and terminology used in\u00a0transfer pricing:<\/p>\n