The Organisation for Economic Cooperation and Development (OECD) released the revised version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022 on 20 January 2022.

According to the OECD release, the Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle,” which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises.

The 2022 edition of the Guidelines consolidates into a single publication the changes to the 2017 edition resulting from:

  • The report Revised Guidance on the Transactional Profit Split Method issued in 2018, provided guidance on when the transactional profit split method is considered as the most appropriate method to apply to related party transactions. This is becoming increasingly relevant for integrated businesses and it will very likely be a contentious point to be challenged by progressively aggressive Tax authorities as they continue to introduce transfer pricing rules into their local regulations. These challenges are already a reality for the Financial Services and Information Technology sectors in the Middle East.
  • The report Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles issued in 2018, provided further guidance in response to BEPS Action 8 – Hard to Value Intangibles. Whilst this report is intended to promote common practice in the valuation approaches of particularly highly uncertain intangibles, businesses with highly sophisticated intellectual property (in industries such as Technology) should expect an increase in audits and transfer pricing adjustments. With the Economic Substance Rules (ESR) introduced in the Middle East, Tax authorities will most likely rely on these guidelines when performing audits. This may pose challenges for taxpayers from a both transfer pricing and ESR perspective.
  • The report Transfer Pricing Guidance on Financial Transactions was issued in its final form in 2020 and provided dedicated guidance and examples for transfer pricing aspects of financial transactions. Middle East businesses (such as banks and corporates) that have outdated funds transfer pricing (FTP) policies should align the pricing of financial transactions and central treasury functions with these guidelines.
  • The consistency changes needed across the rest of the previous OECD Transfer Pricing Guidelines led to the launch of this new consolidated version of the Transfer Pricing Guidelines.

Important considerations for Middle East businesses

Middle East Groups will already be aware that the region has emphasized transfer pricing as an area of concern for the corporate tax base. In response, many countries have implemented dedicated transfer pricing and arm’s length provisions into their domestic tax regimes. Countries in the region with dedicated transfer pricing rules include the Kingdom of Saudi Arabia, Qatar, Oman, Egypt and most recently Jordan.

In a global economy where multinational groups play a major role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike and the OECD Transfer Pricing Guidelines are the international standard, used by both taxpayers and tax administrations, in evaluating the arm’s length nature of related party transactions. Groups operating in the Middle East should now consider whether their related party transactions are in line with the 2022 edition of the Guidelines.

Tax administrations continue to be active in conducting transfer pricing audits and it is likely a matter of time before we see them adopt the 2022 Guidelines in their interpretation and assessments of related party transactions. It remains to be seen whether the administrations will consider the 2022 Guidelines for reviewing transactions prior to 2022. Groups should continue to annually monitor their transactions and ensure their pricing is aligned to the latest OECD developments.