UN Updates Manual on Transfer Pricing: Address Comparability and Group Synergies Issue

; posted on
October 23rd, 2019

The United Nation's Transfer Pricing subcommittee has sent a new round of proposed changes to the U.N. manual for developing countries, including a revised comparability chapter and new guidance on group synergies and centralized procurement functions.


The draft chapter on comparability adds references to the “accurately delineated transaction” — a term introduced by the OECD’s BEPS report on actions 8-10. Quoting the Manual, in the process of undertaking a Transfer Pricing analysis, the first step should always involves the accurate delineation of the transaction, including an awareness of the industry and market context in which the transaction takes place. Further, the Manual also reiterate the important of using quantitative screens in comparables searches. The quantitative screening as included in the manual includes industry qualification codes, geography, independence indicator, availability of financial information, type of financial account, primary screening for functional comparability (intangibles, inventory, and marketing expense screening), etc.

In line with the Platform for Collaboration on Tax’s toolkit for addressing the lack of domestic comparables, the draft advises countries against prohibiting use of foreign comparables or defaulting to the profit-split method. Further, adjustments may need to be considered and made where they improve the reliability of the comparison.

New guidance on group synergies and centralized procurement functions

The draft’s more extensive discussion of group synergies applies the approach adopted by the OECD guidelines, under which synergies do not warrant a separate charge unless they result from deliberate concerted action by one of the parties.

The proposed guidance on centralized procurement structures focuses on the criteria for selecting the most appropriate transfer pricing method and the consequences that the choice of method can have for the amount of income attributed to a procurement hub. Applying a commission rate determined using the comparable uncontrolled price method can result in a much wider range of outcomes than would be possible under the cost-plus method or transactional net margin method, according to the draft.

Tax administrations should set a relatively high standard for taxpayers to establish the existence of capabilities, functions, or risks that would warrant selection of the CUP method. Replication of pricing structures used by independent outsourced procurement services providers is rarely an option that can be adopted in practice because of the difficulties in finding such data, in interpreting it reliably in the context of the controlled arrangement, and in estimating appropriate adjustments. Hence, the draft provides other method which is cost-plus method. The cost-plus method or transactional net margin method can be applied in most cases, even in cases where the centralized procurement company provides expert services and employs know-how and proprietary tools. Where the activities contribute significantly to commercial performance of the multinational enterprise (MNE) group and involve control of economically significant risks for the MNE group, other methods may be appropriate.

UN Manual Transfer Pricing

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