THE UN has released the Draft TP Manual for the Developing Countries. In accordance with ECOSOC decision in July this year, the eighth annual session of the Committee of Experts on International Cooperation in Tax Matters will be held from 15 to 19 October 2012 at the Palais des Nations in Geneva. The main focus of the session will be the Practical Manual on Transfer Pricing for Developing Countries, which will be presented for adoption by the Committee. The session will also address other important areas, such as tax treatment of services, revision of the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries and capacity building in national tax systems.

Although it is for each country to choose its tax system, this Manual is addressed at countries seeking to apply the “arm's length standard" to transfer pricing issues, as the approach, which nearly every country seeking to address such issues will decide to take. Such an approach minimises double taxation disputes with other countries, with their potential impact on how a country's investment "climate” is viewed, while combating potential profit-shifting between jurisdictions where a MNE operates.

The objective of this chapter is to reflect the legal environmental background of transfer pricing legislation in a global scale and, if possible, identify some important practical issues from the perspectives of developing countries.

To prevent possible tax base erosion, caused by related party pricing, many countries have introduced domestic tax rules to regulate/adjust such incorrect pricing. The current global consensus is that, among related parties, income should be allocated in accordance with the arm's length principle (“ALP”).

Competent Authority (CA) negotiations as set forth in the Mutual Agreement Procedure (“MAP”) under bilateral treaties based upon Articl 25 of the UN and OECD Models) have been made more effective due to supplementary domestic regulations and international agreements and practice regarding those procedures.

The 2010 OECD TP Revised Guidelines established a new standard, “the most appropriate method rule” in selecting a TPM. If this standard is generally accepted and implemented in domestic legislation, the risk of double taxation, caused by the difference in priority would be reduced substantially. However its impact upon administrations also needs to be considered and until such a global legal environment change has materialized, it would be expected that at least an agreement on the most appropriate method rule by any tax treaty could attain that objective on MAP cases.

It is intersting to note that Transfer Pricing (TP) in domestic legislation was first introduced by the United Kingdom in 1915, followed by the United States in 1917. But it gained prominence in 1960's when international commercial transactions expanded greatly in volume. The development of TP legislation has mainly been led by developed countries, hence challenges continue on TP issues related to third world.