About transfer pricing
Transfer Pricing
Transfer pricing (TP) is a term within international tax law. The term refers to prices and conditions agreed upon in transactions between associated enterprises.
Prices and conditions between associated enterprises should be agreed upon as between independent parties. We say that the prices should be at arm's length, and in accordance with the arm's length principle.
At least two different tax authorities are involved in cross-border transactions. This means there's a risk that different enterprises in the group is taxed based on the same income (economic double taxation). This can happen if the tax administration in each country assesses the same transaction differently due to differences in domestic laws and/or different interpretations of the OECD Transfer Pricing Guidelines.
Transfer pricing is an international term that's often shortened to TP.
Below we describe some key terms and concepts within transfer pricing that you should know about.
The arm's length principle
The arm's length principle is an internationally recognised principle that's also part of Norwegian law.
The prices and conditions of controlled transactions are in accordance with the arm’s length principle when they correspond to what independent parties would have agreed upon under similar circumstances. You can determine whether the price of a controlled transaction follows the arm's length principle by conducting a comparability analysis.
The arm's length principle is abbreviated to ALP.
The arm's length principle is implemented in section 13-1 of the Norwegian Taxation Act, which refers to the OECD Transfer Pricing Guidelines. Internationally, the arm's length principle is expressed in Article 9 of the OECD Model Tax Convention.
Group companies that are subject to different tax regimes may be motivated by reducing the overall tax burden when they determine the prices and conditions for intragroup transactions. In practice, this means that group companies may set higher or lower prices in transactions to increase the profits in countries with low corporate tax rates or increase losses in countries with higher corporate tax rates.
Example: Company A is a product manufacturer
- Total turnover for Company A is NOK 100,000.
- Company A purchases goods to use in production.
- The market price (arm's length price) for the goods used in production is
NOK 5,000. - Company B is a company within the same group as A (associated enterprises).
- Company A is in a country with a corporate tax rate of 22%.
- Company B is in a country with a corporate tax rate of 15%.
Example 1: Intragroup purchase of goods – controlled transaction
- Company A buys goods from Company B for NOK 10,000 (excessive price).
- Taxable income for Company A is NOK 90,000.
- Taxable income for Company A is reduced with NOK 5,000 due to excessive price.
- Sale at an excessive price increases profit for Company B with NOK 5,000, which is taxable for Company B.
| Profit Company A | Tax payable Company A (22%) | Profit Company B | Tax payable Company B (15%) | Group tax payable (ETR) |
| 90 000 | 19 800 | 10 000 | 750 | 20 550 |
Eksempel 2:
- Company A buys goods from an independent party for the market price of NOK 5,000.
- Company A generates a taxable profit of NOK 95,000.
| Profit Company A | Tax payable Company A (22%) |
Profit Company B |
Tax payable Company B (15%) | Group tax payable (ETR) |
| 95 000 | 20 900 | 20 990 |
Reduction of total tax payable (Example 1): 350
ETR – Effective Tax Rate
Community of interest
The terms community of interest and the arm's length principle
Community of interest is a term used in section 13-1 of the Norwegian Taxation Act. Section 13-1 articulates the arm's length principle in Norwegian law. The regulation allows the tax authorities to determine income/assets by discretion if:
- income/wealth has been reduced, and
- the reduction is due to a community of interest with another person, company, or entity.
If this is the case, the income should be determined as if the community of interest does not exist.
The term "community of interest" (“interessefellesskap” in Norwegian) means there exists an interdependent relationship between the parties. This corresponds with the condition of the arm's length principle that prices should be determined as between independent parties.
This is a community of interest
You may be in a community of interest with other entities in several ways.
A community of interest may arise, among other things, through ownership or economic affiliations. You must assess on a case-by-case basis whether you're part of a community of interest.
Examples of communities of interest include:
- Direct ownership – typically between a parent company in one country and a subsidiary in another country.
- Indirect connection – Two group companies in different countries that are owned by the same parent company.
- Producer and distributor – an economic affiliation where decisions made by one company may have direct consequences for the other company.
Controlled transactions
Controlled transactions, also known as intragroup transactions, are transactions between associated enterprises. For Norwegian tax purposes associated enterprises are parties in communities of interest. Similarly, we refer to transactions outside communities of interest (between independent parties) as uncontrolled transactions.
A transaction involves something being transferred from one party to another, and where the receiving party remunerates the transferring party. Assets and services are examples of what can be transferred in a transaction. Assets include both tangible and intangible assets. The remuneration may be cash, shares, or other services.
Examples of controlled transactions are:
- sale of goods from a foreign group company to a Norwegian group company
- licensing of technology from a foreign parent company to a Norwegian subsidiary
See "Examples of transaction types" for more examples on controlled transactions.
Outstanding accounts are unsettled economic relationships, such as debts, guarantees or similar. It may also involve one party assuming an obligation on behalf of another party.
To ensure that the price of the transaction is arm's length, you must prepare a comparability analysis. As a part of the analysis, you must identify and describe the transactions in detail.
Transfer pricing laws and regulations
The Taxation Act, section 13-1 – Community of interest (lovdata.no) (in Norwegian only)
The Taxation Act's main rule on transfer pricing and transactions in communities of interest. It establishes the arm's length principle for Norwegian tax purposes and allows the Tax Administration to set aside price or conditions of a transaction if it's not in accordance with the arm's length principle. The regulation states that we should take into consideration the OECD Transfer Pricing Guidelines when assessing whether prices correspond with the arm's length principle.
Section 8-11 of the Tax Administration Act – Reporting and other documentation for controlled transactions, etc. (lovdata.no) (in Norwegian only)
Section 8-11, subsection 1 of the Tax Administration Act and section 8-11-1 of the Tax Administration Regulations regulate what information you must submit in the tax return (duty of disclosure).
Section 8-11, subsection 2 of the Tax Administration Act and sections 8-11-1 and 8-11-3 to 8-11-16 of the Tax Administration Regulation set out the rules regarding who must prepare mandatory transfer pricing documentation, what it must include, and when you need to submit this to the Norwegian Tax Administration.
Section 8-12 of the Tax Administration Act – Reporting of multinational corporations' distribution of income, tax, etc. (lovdata.no) (in Norwegian only)
Provision about groups with a reporting obligation pursuant to the Country-by-Country regulation on how they should report. Read more about Country-by-Country reporting.
OECD Transfer Pricing Guidelines (oecd.org)
The transfer pricing guidelines describe how to analyse transactions and how to set an arm's length price.
OECD Model Tax Convention (oecd.org)
The Model Tax Convention is used as a basis for entering into tax treaties between two countries. The comments to the Model Tax Convention provide guidance on how agreements based on the Model Convention should be understood in practice.
Attribution of Profits to Permanent Establishments (oecd.org)
The OECD report on allocation of profits to permanent establishments describes how profits are to be allocated according to tax treaties through the Authorised OECD Approach. There are two editions of the report, the 2008 edition (limited AOA) and the 2010 edition (full AOA).