Arm's length principle

Based on the price that two unrelated/independent parties would agree to for a transaction.

Associated enterprise

A component of a multinational group.

Comparable uncontrolled prices method

An arm's length method which compares the dealings between related parties to third party dealings in terms of product characteristics and market characteristics.

Multinational Enterprises (MNEs)

An enterprise operating in several countries but managed from one (home) country. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational enterprise.

Profit shifting

A form of transfer pricing manipulation where a multinational group engages in practices to reduce its overall tax bills.

This is usually done by shifting profits from entities based in higher taxing countries to an associated entity in a lower taxing country through under-charging or over-charging on intra-group trade.

Tax treaty

A mechanism to coordinate taxing rights between two countries.

Thin capitalisation

When the capital of a company is made up of a much larger contribution of debt than equity.

This form of leveraging may be utilised as the distribution of interest on debts may be deducted as interest whereas the distribution on stock are non-deductible dividends.

Transactional net margin method

An arm's length method which compares the functions (taking into account the assets used and risks assumed) in the related party dealings with third party dealings and the arm's length net margins obtained.

Transfer pricing

A transfer price is used to determine costs between individual entities of a multinational enterprise for transactions between each other for goods and services.

Transfer pricing adjustment

A tax adjustment made by the ATO when it determines that the pricing scheme of an enterprise falls outside the range of what is considered to be an arm's length transaction between related enterprises.

Transfer pricing benefit

Based on the difference between the profits that an entity would have made having regard to the arm's length principle, and the amount it actually made.