 Hello and welcome to the session. This is Professor Farhad. In this session, we would look at government reaction when it comes to transfer pricing. Specifically, we're going to be looking at the organization for economic cooperation and development OECD. This topic is covered in international accounting or taxation course. As always, I would like to remind you to connect with me on LinkedIn. YouTube is what you would need to subscribe. I have 1500 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover, including CPA material. On my website, you can find additional information such as PowerPoint slides, notes, true, false, multiple choice. And if you're studying for your CPA exam, 2000 plus CPA questions. Now, if you don't understand what international transfer pricing is, please look in the description. I have recordings that might help you kind of prepare yourself for this recording. So we're going to look at the government reaction specifically about from the OECD countries. And the next session would look at the US government reaction. So national tax authorities, obviously they're not dumb in a sense that they know that multinational companies, they may use discretionary transfer pricing to avoid paying income taxes, import duties, strategies for withholding taxes that we looked at in the prior session, so on and so forth. So what happened is most countries have guidelines regarding what will be considered an acceptable transfer price for tax purposes. So just because the multinational decided that's the transfer price, the government, they might be able to say, well, they could challenge you. So across countries, these guidelines can conflict. And what happened sometime, you could have double taxation when the price accepted in one country may be this allowed in another. So it's a very complicated issue in the real world. So we're going to be looking at the OECD guidelines. And basically the OECD guidelines started to develop those transfer pricing as early as the late 1970s. And they supplemented or amended those rules over the years because rules are always changing. But the basic rule is that transfer price must be made at arm's length. Okay, arm's length. Okay. What does arm's length mean? It's the prices that you would charge between independent parties in the same circumstances. So what would you charge? What would you charge the other party if it was an external party? If that's the price you would charge them, then your transfer price is acceptable. Now there are many exceptions, many rules, but that's the general rule. So the guidelines also acknowledge the need for the companies to document. And this is important, the arm length nature of the transfer pricing. So you want to document, you want to have record of why did you choose this price? Okay, so the idea is that by adopting the OECD guidelines, member will avoid conflicts, conflict with tax and authorities. Okay, but remember rules are only a model. They don't have any enforcement power. So the OECD rules are not guidelines. Let's be more specific guidelines. They're not actual laws. So they cannot be implemented, but those are guidelines. If you follow, you should be safe in that sense. Okay, but also each country is, they have their own transfer pricing, but most of them, they follow those rules. So because each country is different, therefore, they might have specific rules. So we have something called the OECD country by country reporting, which is a report we're going to look at briefly in the session. I might revisit it when I look at the US transfer pricing model. And it's based, it stems from the OECD base erosion and profit sharing. The BIPPS Act includes something called Action 13. So what does that mean? It means transfer price and documentation and country by country reported, which provide a template for the country by country by multinational enterprise. So simply put, you have this country by country reporting, you fill it up basically as a form and it's a template that the OECD countries do use. So the report is intended to provide the tax authorities with the information that can be used, that can be used to identify situation in which companies have the capability of shifting profit to low or no income or to no tax jurisdiction. So basically it's a form to assist tax authorities in targeting their audit and building a case if there is a case to be built. So you have to kind of prepare this country by country, country by country reporting. So what do you have to report? So simply put, let's take a look at this kind of important form in this context. So to require the multinational to annually file a report with their home tax and authorities that disclose for each jurisdiction in which conduct business, first the amount of revenue, the before tax profit. So if you are reporting a lot of revenues and your before tax profit is low, they might question that. Why do you have a lot of revenues but not profit? All what I'm saying is those are guidelines. How much taxes you paid? Well, you might be reporting a lot of revenues but only 3% in taxes then you might be questioned. So simply put, those numbers, they can be used as a guideline that makes it easier for tax and authorities to look at your record and determine whether you, an audit is required or a closer look is required. The number of employees, the capital that you are employing and your tangible asset. In addition to that, each entity within the jurisdiction must describe separately with an indication of its business activity. So what exactly do you do? So this way, if you're in restaurant business, you might have a certain gross margin. If you're in the retail business, you might have other gross margin. So it tells the company, tells the tax and authority a lot about your business. So this is in a brief, the OECD response. In the next session, we would look at the US transfer pricing rule because the US is basically represent, represent a large portion of the international trade. As always, I would like to remind you on my website, I do have additional lectures, additional courses, additional resources. If you are interested, please visit my website. Consider subscribing as it is an investment in your career. Good luck and study.