Unsuccessful Implementation of the OECD Transfer Pricing Guidelines in Low-Income Countries: The Case of Ethiopia

Transfer pricing refers to the technique of ascertaining the value or price of business transactions between related parties for tax purposes. The price of business transactions between related business entities (for example, a subsidiary and a parent company) is subject to a special assessment regime (that is, transfer pricing) because such a price is susceptible to being artificially set and, therefore, at variance with the tax that would have been obtained in the case of comparable transactions between unrelated parties. Multinational enterprises (MNEs) operating in multiple jurisdictions artificially price transactions between entities within their group to shift taxable profits out of jurisdictions where tax liabilities are higher. In response, international tax rules allow national tax authorities to reassess whether transactions between related parties are undertaken on the basis of the so-called arm’s length principle (which resembles transactions between unrelated parties) and to make tax adjustments where necessary.