Following approval at the twenty-second session of the UN Committee of Experts on International Cooperation in Tax Matters, held from 19 to 28 April 2021, the UN has published the third edition of its Practical Manual on Transfer Pricing for Developing Countries.
The latest edition draws on the experience of the first two editions of the Manual and the feedback received and reflects recent developments in transfer pricing analysis and administration. The Manual is intended to explain the operation of Article 9 (associated enterprises) of the UN Model Tax Convention and is consistent with the commentaries to the UN Model. It therefore aims to clarify the operation of the arm’s length principle in a way that can avoid double taxation and prevent or resolve transfer pricing disputes.
The Manual aims to reflect the needs of developing countries and to take into account their level of capacity development. Where necessary the Manual outlines the relevant issues for developing countries and the options available to them. Feedback from developing countries has helped to identify priority areas for improvement and has contributed to more accurately targeted explanations and examples in the Manual.
The share of related party transactions in global trade has reached a higher level than was estimated in the previous editions of the Manual and the issues dealt with in the Manual are therefore increasingly important. The UN Manual has been revised taking into account the OECD reports on base erosion and profit shifting in relation to transfer pricing and the follow-up work, but it reflects the position of developing countries and in particular the special needs of the least developed economies.
The third edition of the UN Manual includes a new chapter on financial transactions which looks at the types of intragroup financial transactions, transfer pricing methods applicable and simplification measures that could be used. The chapter examines the application of the arm’s length principle to intra-group loans and to intra-group financial guarantees. The new edition also includes new content in relation to profit splits, centralized procurement functions and comparability issues.
Part D of the Manual in respect of country practices includes material in relation to Kenya, which among other information lists the ways in which Kenya has enhanced its transfer pricing rules to implement recommendations of the OECD’s BEPS reports. These include a widening of the definition of controlled transactions to include companies in low tax jurisdictions even when they are not related parties. Kenya is also widening the definition of a permanent establishment as recommended in the BEPS reports and is enacting expanded documentation rules to include country by country reporting; disclosure of beneficial ownership; documentation on domestic transactions; and penalties for failure to maintain transfer pricing documentation. Kenya is also enhancing tax dispute resolution procedures and reviewing the double tax treaty policy and negotiating strategy. A framework for advance pricing agreements has been developed and there are proposals to include this into the legislation.
The third edition of the UN Manual can be found on the UN website at: https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf
