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Content from Annex I to Chapter IV: Sample Memoranda of Understanding for Competent Authorities to establish bilateral safe harbours
This Annex contains sample Memoranda of Understanding (MOUs) for use by Competent Authorities in negotiating bilateral safe harbours for common categories of transfer pricing cases involving low risk distribution functions, low risk manufacturing functions, and low risk research and development functions. It is intended to provide jurisdictions with a tool to adapt and use in addressing, through bilateral safe harbours, important classes of transfer pricing cases that now take up a great deal of time and effort when processed on a case by case basis. Competent authorities are of course free to modify, add or delete any provision of the sample agreement when concluding their own bilateral agreements.
This Annex contains sample Memoranda of Understanding (MOUs) for use by Competent Authorities in negotiating bilateral safe harbours for common categories of transfer pricing cases involving low risk distribution functions, low risk manufacturing functions, and low risk research and development functions. It is intended to provide jurisdictions with a tool to adapt and use in addressing, through bilateral safe harbours, important classes of transfer pricing cases that now take up a great deal of time and effort when processed on a case by case basis. Competent authorities are of course free to modify, add or delete any provision of the sample agreement when concluding their own bilateral agreements.
As described in Chapter IV, Section E.4 of these Guidelines, one of the potential problems arising from the use of unilateral transfer pricing safe harbours is that they may increase the risk of double taxation and double non-taxation. This can occur if the jurisdiction granting the unilateral safe harbour shades the safe harbour towards the high end of an acceptable arm’s length profit range, while a treaty partner on the other end of the transaction disagrees with the assertion that the defined safe harbour profit level reflects arm’s length dealing. Some critics contend that there is a tendency for safe harbour profit ranges to increase over time, exacerbating this potential problem. It is also sometimes suggested that unilateral safe harbours can tend to force taxpayers into reporting higher than arm’s length levels of income, and to incur some resulting double taxation, as the price to be paid for administrative convenience and simplicity. Finally, unilateral safe harbours can, at times, provide a windfall to taxpayers whose specific facts might suggest that income above the safe harbour level would be more consistent with arm’s length dealing.
As described in Chapter IV, Section E.4 of these Guidelines, one of the potential problems arising from the use of unilateral transfer pricing safe harbours is that they may increase the risk of double taxation and double non-taxation. This can occur if the jurisdiction granting the unilateral safe harbour shades the safe harbour towards the high end of an acceptable arm’s length profit range, while a treaty partner on the other end of the transaction disagrees with the assertion that the defined safe harbour profit level reflects arm’s length dealing. Some critics contend that there is a tendency for safe harbour profit ranges to increase over time, exacerbating this potential problem. It is also sometimes suggested that unilateral safe harbours can tend to force taxpayers into reporting higher than arm’s length levels of income, and to incur some resulting double taxation, as the price to be paid for administrative convenience and simplicity. Finally, unilateral safe harbours can, at times, provide a windfall to taxpayers whose specific facts might suggest that income above the safe harbour level would be more consistent with arm’s length dealing.
These double tax and windfall issues would likely be quite pronounced in connection with safe harbours directed at some of the most common types of transfer pricing transactions. Transactions such as sales of goods to a local distribution affiliate for resale on a limited risk basis in the local market, contract manufacturing arrangements, and contract research arrangements could clearly raise these issues. It is perhaps for this reason that few jurisdictions, if any, have developed functioning safe harbours for dealing with these common types of transfer pricing issues.
These double tax and windfall issues would likely be quite pronounced in connection with safe harbours directed at some of the most common types of transfer pricing transactions. Transactions such as sales of goods to a local distribution affiliate for resale on a limited risk basis in the local market, contract manufacturing arrangements, and contract research arrangements could clearly raise these issues. It is perhaps for this reason that few jurisdictions, if any, have developed functioning safe harbours for dealing with these common types of transfer pricing issues.
Distribution margins and manufacturing mark-ups can sometimes be quite consistent across geographies and across many industries. Therefore guidance on normal settlement ranges for these types of cases could have the effect of reducing the number of transfer pricing audits and reducing competent authority dockets and other transfer pricing controversy by a substantial margin if reasonable ranges of results could be agreed bilaterally and published.
Distribution margins and manufacturing mark-ups can sometimes be quite consistent across geographies and across many industries. Therefore guidance on normal settlement ranges for these types of cases could have the effect of reducing the number of transfer pricing audits and reducing competent authority dockets and other transfer pricing controversy by a substantial margin if reasonable ranges of results could be agreed bilaterally and published.
These types of cases could potentially be addressed through bilateral MOUs adopted and publicised by competent authorities. Some jurisdictions have adopted such arrangements on a bilateral basis. The general view of such jurisdictions is that treaty provisions based on Article 25(3) of the OECD Model Tax Convention provide sufficient authority to support a bilateral competent authority agreement on a safe harbour rule that would apply to numerous similarly situated taxpayers. Article 25(3) provides: “The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.” A competent authority agreement on a bilateral transfer pricing safe harbour should properly be characterised as a “mutual agreement” that “resolves difficulties or doubts arising as to the interpretation or application” of Article 9 of the Treaty.
These types of cases could potentially be addressed through bilateral MOUs adopted and publicised by competent authorities. Some jurisdictions have adopted such arrangements on a bilateral basis. The general view of such jurisdictions is that treaty provisions based on Article 25(3) of the OECD Model Tax Convention provide sufficient authority to support a bilateral competent authority agreement on a safe harbour rule that would apply to numerous similarly situated taxpayers. Article 25(3) provides: “The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.” A competent authority agreement on a bilateral transfer pricing safe harbour should properly be characterised as a “mutual agreement” that “resolves difficulties or doubts arising as to the interpretation or application” of Article 9 of the Treaty.
Although nothing would prevent the jurisdictions’ competent authorities from adopting safe harbour provisions under Article 25(3) on a multilateral basis if the conditions and circumstances so allow, the particular types of transactions described above are such that jurisdictions will often adopt a bilateral approach.
Although nothing would prevent the jurisdictions’ competent authorities from adopting safe harbour provisions under Article 25(3) on a multilateral basis if the conditions and circumstances so allow, the particular types of transactions described above are such that jurisdictions will often adopt a bilateral approach.
If such MOUs existed, qualifying taxpayers would be able to manage their financial results to fall within the agreed safe harbour range, secure in the understanding that those results would be accepted in both jurisdictions agreeing to the MOU concerned. A commonly cited precedent for this type of approach is the agreement between the United States and Mexico regarding safe harbour profit ranges for maquiladora operations.
If such MOUs existed, qualifying taxpayers would be able to manage their financial results to fall within the agreed safe harbour range, secure in the understanding that those results would be accepted in both jurisdictions agreeing to the MOU concerned. A commonly cited precedent for this type of approach is the agreement between the United States and Mexico regarding safe harbour profit ranges for maquiladora operations.
A bilateral approach to the development of safe harbours would have a number of advantages over unilateral transfer pricing safe harbours:
A bilateral approach to the development of safe harbours would have a number of advantages over unilateral transfer pricing safe harbours:
The following elements may be of relevance in the negotiation and conclusion of an MOU.
The following elements may be of relevance in the negotiation and conclusion of an MOU.
Set forth below are sample MOUs for three types of transactions: (i) performance of low risk manufacturing services; (ii) performance of low risk distribution services; and (iii) performance of low risk contract research and development services.
Set forth below are sample MOUs for three types of transactions: (i) performance of low risk manufacturing services; (ii) performance of low risk distribution services; and (iii) performance of low risk contract research and development services.
The Competent Authorities of [State A] and [State B] have reached an understanding relating to the arm’s length remuneration applicable to low risk manufacturing services performed by a Qualifying Enterprise resident in [State A] on behalf of an associated enterprise resident in [State B], and by a Qualifying Enterprise resident in [State B] on behalf of an associated enterprise resident in [State A] in the circumstances described herein. The purpose of this memorandum of understanding is to provide legal certainty to Qualifying Enterprises by establishing specific procedures to comply with the transfer pricing rules in [State A] and [State B] and to eliminate double taxation.
The Competent Authorities of [State A] and [State B] have reached an understanding relating to the arm’s length remuneration applicable to low risk manufacturing services performed by a Qualifying Enterprise resident in [State A] on behalf of an associated enterprise resident in [State B], and by a Qualifying Enterprise resident in [State B] on behalf of an associated enterprise resident in [State A] in the circumstances described herein. The purpose of this memorandum of understanding is to provide legal certainty to Qualifying Enterprises by establishing specific procedures to comply with the transfer pricing rules in [State A] and [State B] and to eliminate double taxation.
This memorandum of understanding is entered into under authority of Article [25] of the [Tax Treaty] (the “Treaty”) between [State A] and [State B]. It implements the principles of Article [9] of the Treaty in the circumstances described herein. It applies to taxable years of Qualifying Enterprises ending in calendar years [20__] through [20__]. This term will be extended for another five years unless either State notifies the other, in writing, of its intent to terminate this memorandum of understanding on or prior to December 31 [20__]. Expiration of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the last day of the calendar year in which the application of this memorandum of understanding terminates.
This memorandum of understanding is entered into under authority of Article [25] of the [Tax Treaty] (the “Treaty”) between [State A] and [State B]. It implements the principles of Article [9] of the Treaty in the circumstances described herein. It applies to taxable years of Qualifying Enterprises ending in calendar years [20__] through [20__]. This term will be extended for another five years unless either State notifies the other, in writing, of its intent to terminate this memorandum of understanding on or prior to December 31 [20__]. Expiration of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the last day of the calendar year in which the application of this memorandum of understanding terminates.
For purposes of this memorandum of understanding, an “enterprise” means the enterprise defined in Article [3], paragraph [1] of the Treaty.
For purposes of this memorandum of understanding, an “enterprise” means the enterprise defined in Article [3], paragraph [1] of the Treaty.
For purposes of this memorandum of understanding, a Qualifying Enterprise must have each of the characteristics described in this paragraph.
For purposes of this memorandum of understanding, a Qualifying Enterprise must have each of the characteristics described in this paragraph.
A Qualifying Enterprise may not:
A Qualifying Enterprise may not:
For purposes of this memorandum of understanding, a Qualifying Transaction shall be (i) the rendering of manufacturing services by the Qualifying Enterprise on behalf of an associated enterprise resident in the other Contracting State and/or (ii) the sale of manufactured products produced by the Qualifying Enterprise to an associated enterprise resident in the other Contracting State, in each case without the interposition of other transactions or parties.
For purposes of this memorandum of understanding, a Qualifying Transaction shall be (i) the rendering of manufacturing services by the Qualifying Enterprise on behalf of an associated enterprise resident in the other Contracting State and/or (ii) the sale of manufactured products produced by the Qualifying Enterprise to an associated enterprise resident in the other Contracting State, in each case without the interposition of other transactions or parties.
In the event a Qualifying Enterprise elects to apply the provisions of this memorandum of understanding:
In the event a Qualifying Enterprise elects to apply the provisions of this memorandum of understanding:
Each of [State A] and [State B] agree that compensation for Qualifying Transactions calculated in accordance with this memorandum of understanding shall be deemed to constitute an arm’s length level of compensation for purposes of applying the transfer pricing rules of such State and the provisions of Article [9] of the Treaty.
Each of [State A] and [State B] agree that compensation for Qualifying Transactions calculated in accordance with this memorandum of understanding shall be deemed to constitute an arm’s length level of compensation for purposes of applying the transfer pricing rules of such State and the provisions of Article [9] of the Treaty.
The Competent Authorities of [State A] and [State B] agree that the associated enterprise which is party to a Qualifying Transaction shall not be deemed to have a permanent establishment in the jurisdiction of residence of the Qualifying Enterprise by virtue of the performance of low risk manufacturing services on its behalf by the Qualifying Enterprise or by virtue of such associated enterprise taking title to products produced by the Qualifying Enterprise in the jurisdiction of residence of the Qualifying Enterprise.
The Competent Authorities of [State A] and [State B] agree that the associated enterprise which is party to a Qualifying Transaction shall not be deemed to have a permanent establishment in the jurisdiction of residence of the Qualifying Enterprise by virtue of the performance of low risk manufacturing services on its behalf by the Qualifying Enterprise or by virtue of such associated enterprise taking title to products produced by the Qualifying Enterprise in the jurisdiction of residence of the Qualifying Enterprise.
A Qualifying Enterprise and the relevant associated enterprise may elect to apply the provisions of this memorandum of understanding consistently in [State A] and [State B] by filing a notice with [__] of [State A] and [__] of [State B] no later than [__] covering the Qualifying Transactions.
A Qualifying Enterprise and the relevant associated enterprise may elect to apply the provisions of this memorandum of understanding consistently in [State A] and [State B] by filing a notice with [__] of [State A] and [__] of [State B] no later than [__] covering the Qualifying Transactions.
The required notice shall include:
The required notice shall include:
Satisfaction of the election and reporting requirements of this memorandum of understanding, and reporting income calculated in accordance with its terms in a timely filed tax return for the year, shall relieve the Qualifying Enterprise and its relevant associated enterprise from the obligation to comply with the otherwise applicable transfer pricing documentation requirements of [State A] and [State B] with respect to the Qualifying Transactions.
Satisfaction of the election and reporting requirements of this memorandum of understanding, and reporting income calculated in accordance with its terms in a timely filed tax return for the year, shall relieve the Qualifying Enterprise and its relevant associated enterprise from the obligation to comply with the otherwise applicable transfer pricing documentation requirements of [State A] and [State B] with respect to the Qualifying Transactions.
A Qualifying Enterprise and its relevant associated enterprise not electing treatment of their Qualifying Transactions under this memorandum of understanding shall be subject to the application of the transfer pricing and documentation rules of [State A] and [State B] as if this memorandum of understanding were not in force.
A Qualifying Enterprise and its relevant associated enterprise not electing treatment of their Qualifying Transactions under this memorandum of understanding shall be subject to the application of the transfer pricing and documentation rules of [State A] and [State B] as if this memorandum of understanding were not in force.
All disputes with regard to the application of this memorandum of understanding shall be referred to the competent authorities of [State A] and [State B] for resolution by mutual agreement.
All disputes with regard to the application of this memorandum of understanding shall be referred to the competent authorities of [State A] and [State B] for resolution by mutual agreement.
The competent authorities of [State A] and [State B] may exchange information where necessary to carry out this agreement under the provisions of Article [26] of the Treaty.
The competent authorities of [State A] and [State B] may exchange information where necessary to carry out this agreement under the provisions of Article [26] of the Treaty.
Either [State A] or [State B] may terminate this memorandum of understanding at any time upon written notice to the competent authority of the other Contracting State and publication of such notice. Such termination will have effect for taxable years of Qualifying Enterprises beginning after the last day of the calendar year in which delivery and publication of such notice of termination occurs.
Either [State A] or [State B] may terminate this memorandum of understanding at any time upon written notice to the competent authority of the other Contracting State and publication of such notice. Such termination will have effect for taxable years of Qualifying Enterprises beginning after the last day of the calendar year in which delivery and publication of such notice of termination occurs.
The Competent Authorities of [State A] and [State B] have reached an understanding relating to the arm’s length remuneration applicable to low risk distribution services performed by a Qualifying Enterprise resident in [State A] on behalf of an associated enterprise resident in [State B], and by a Qualifying Enterprise resident in [State B] on behalf of an associated enterprise resident in [State A] in the circumstances described herein. The purpose of this memorandum of understanding is to provide legal certainty to Qualifying Enterprises by establishing specific procedures to comply with the transfer pricing rules in [State A] and [State B] and to eliminate double taxation.
The Competent Authorities of [State A] and [State B] have reached an understanding relating to the arm’s length remuneration applicable to low risk distribution services performed by a Qualifying Enterprise resident in [State A] on behalf of an associated enterprise resident in [State B], and by a Qualifying Enterprise resident in [State B] on behalf of an associated enterprise resident in [State A] in the circumstances described herein. The purpose of this memorandum of understanding is to provide legal certainty to Qualifying Enterprises by establishing specific procedures to comply with the transfer pricing rules in [State A] and [State B] and to eliminate double taxation.
This memorandum of understanding is entered into under authority of Article [25] of the [Tax Treaty] (the “Treaty”) between [State A] and [State B]. It implements the principles of Article [9] of the Treaty in the circumstances described herein. It applies to taxable years of Qualifying Enterprises ending in calendar years [20__] through [20__]. This term will be extended for another five years unless either State notifies the other, in writing, of its intent to terminate this memorandum of understanding on or prior to December 31 [20__]. Expiration of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the last day of the calendar year in which the application of this memorandum of understanding terminates.
This memorandum of understanding is entered into under authority of Article [25] of the [Tax Treaty] (the “Treaty”) between [State A] and [State B]. It implements the principles of Article [9] of the Treaty in the circumstances described herein. It applies to taxable years of Qualifying Enterprises ending in calendar years [20__] through [20__]. This term will be extended for another five years unless either State notifies the other, in writing, of its intent to terminate this memorandum of understanding on or prior to December 31 [20__]. Expiration of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the last day of the calendar year in which the application of this memorandum of understanding terminates.
For purposes of this memorandum of understanding, an “enterprise” means the enterprise defined in Article [3], paragraph [1] of the Treaty.
For purposes of this memorandum of understanding, an “enterprise” means the enterprise defined in Article [3], paragraph [1] of the Treaty.
For purposes of this memorandum of understanding, a Qualifying Enterprise must have each of the characteristics described in this paragraph.
For purposes of this memorandum of understanding, a Qualifying Enterprise must have each of the characteristics described in this paragraph.
A Qualifying Enterprise may not:
A Qualifying Enterprise may not:
For purposes of this memorandum of understanding, a Qualifying Transaction shall be (i) the rendering of marketing and distribution services by the Qualifying Enterprise on behalf of an associated enterprise resident in the other Contracting State and/or (ii) the sale of products to unrelated customers purchased by the Qualifying Enterprise from an associated enterprise resident in the other Contracting State, in each case without the interposition of other transactions or parties.
For purposes of this memorandum of understanding, a Qualifying Transaction shall be (i) the rendering of marketing and distribution services by the Qualifying Enterprise on behalf of an associated enterprise resident in the other Contracting State and/or (ii) the sale of products to unrelated customers purchased by the Qualifying Enterprise from an associated enterprise resident in the other Contracting State, in each case without the interposition of other transactions or parties.
In the event a Qualifying Enterprise elects to apply the provisions of this memorandum of understanding:
In the event a Qualifying Enterprise elects to apply the provisions of this memorandum of understanding:
Each of [State A] and [State B] agree that compensation for Qualifying Transactions calculated in accordance with this memorandum of understanding shall be deemed to constitute an arm’s length level of compensation for purposes of applying the transfer pricing rules of such State and the provisions of Article [9] of the Treaty.
Each of [State A] and [State B] agree that compensation for Qualifying Transactions calculated in accordance with this memorandum of understanding shall be deemed to constitute an arm’s length level of compensation for purposes of applying the transfer pricing rules of such State and the provisions of Article [9] of the Treaty.
The Competent Authorities of [State A] and [State B] agree that the associated enterprise that is party to a Qualifying Transaction shall not be deemed to have a permanent establishment in the jurisdiction of residence of the Qualifying Enterprise by virtue of the performance of low risk marketing and distribution services on its behalf by the Qualifying Enterprise or by virtue of the Qualifying Enterprise purchasing products from such associated enterprise in Qualifying Transactions for resale to unrelated customers.
The Competent Authorities of [State A] and [State B] agree that the associated enterprise that is party to a Qualifying Transaction shall not be deemed to have a permanent establishment in the jurisdiction of residence of the Qualifying Enterprise by virtue of the performance of low risk marketing and distribution services on its behalf by the Qualifying Enterprise or by virtue of the Qualifying Enterprise purchasing products from such associated enterprise in Qualifying Transactions for resale to unrelated customers.
A Qualifying Enterprise and the relevant associated enterprise may elect to apply the provisions of this memorandum of understanding consistently in [State A] and [State B] by filing a notice with [__] of [State A] and [__] of [State B] no later than [__] covering the Qualifying Transactions.
A Qualifying Enterprise and the relevant associated enterprise may elect to apply the provisions of this memorandum of understanding consistently in [State A] and [State B] by filing a notice with [__] of [State A] and [__] of [State B] no later than [__] covering the Qualifying Transactions.
The required notice shall include:
The required notice shall include:
Satisfaction of the election and reporting requirements of this memorandum of understanding, and reporting income calculated in accordance with its terms in a timely filed tax return for the year, shall relieve the Qualifying Enterprise and its relevant associated enterprise from the obligation to comply with the otherwise applicable transfer pricing documentation requirements of [State A] and [State B] with respect to the Qualifying Transactions.
Satisfaction of the election and reporting requirements of this memorandum of understanding, and reporting income calculated in accordance with its terms in a timely filed tax return for the year, shall relieve the Qualifying Enterprise and its relevant associated enterprise from the obligation to comply with the otherwise applicable transfer pricing documentation requirements of [State A] and [State B] with respect to the Qualifying Transactions.
A Qualifying Enterprise and its relevant associated enterprise not electing treatment of their Qualifying Transactions under this memorandum of understanding shall be subject to the application of the transfer pricing and documentation rules of [State A] and [State B] as if this memorandum of understanding were not in force.
A Qualifying Enterprise and its relevant associated enterprise not electing treatment of their Qualifying Transactions under this memorandum of understanding shall be subject to the application of the transfer pricing and documentation rules of [State A] and [State B] as if this memorandum of understanding were not in force.
All disputes with regard to the application of this memorandum of understanding shall be referred to the competent authorities of [State A] and [State B] for resolution by mutual agreement.
All disputes with regard to the application of this memorandum of understanding shall be referred to the competent authorities of [State A] and [State B] for resolution by mutual agreement.
The competent authorities of [State A] and [State B] may exchange information where necessary to carry out this agreement under the provisions of Article [26] of the Treaty.
The competent authorities of [State A] and [State B] may exchange information where necessary to carry out this agreement under the provisions of Article [26] of the Treaty.
Either [State A] or [State B] may terminate this memorandum of understanding at any time upon written notice to the competent authority of the other Contracting State and publication of such notice. Such termination will have effect for taxable years of Qualifying Enterprises beginning after the last day of the calendar year in which delivery and publication of such notice of termination occurs.
Either [State A] or [State B] may terminate this memorandum of understanding at any time upon written notice to the competent authority of the other Contracting State and publication of such notice. Such termination will have effect for taxable years of Qualifying Enterprises beginning after the last day of the calendar year in which delivery and publication of such notice of termination occurs.
The Competent Authorities of [State A] and [State B] have reached an understanding relating to the arm’s length remuneration applicable to low risk research and development services performed by a Qualifying Enterprise resident in [State A] on behalf of an associated enterprise resident in [State B], and by a Qualifying Enterprise resident in [State B] on behalf of an associated enterprise resident in [State A] in the circumstances described herein. The purpose of this memorandum of understanding is to provide legal certainty to Qualifying Enterprises by establishing specific procedures to comply with the transfer pricing rules in [State A] and [State B] and to eliminate double taxation.
The Competent Authorities of [State A] and [State B] have reached an understanding relating to the arm’s length remuneration applicable to low risk research and development services performed by a Qualifying Enterprise resident in [State A] on behalf of an associated enterprise resident in [State B], and by a Qualifying Enterprise resident in [State B] on behalf of an associated enterprise resident in [State A] in the circumstances described herein. The purpose of this memorandum of understanding is to provide legal certainty to Qualifying Enterprises by establishing specific procedures to comply with the transfer pricing rules in [State A] and [State B] and to eliminate double taxation.
This memorandum of understanding is entered into under authority of Article [25] of the [Tax Treaty] (the “Treaty”) between [State A] and [State B]. It implements the principles of Article [9] of the Treaty in the circumstances described herein. It applies to taxable years of Qualifying Enterprises ending in calendar years [20__] through [20__]. This term will be extended for another five years unless either State notifies the other, in writing, of its intent to terminate this memorandum of understanding on or prior to December 31 [20__]. Expiration of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the last day of the calendar year in which the application of this memorandum of understanding terminates.
This memorandum of understanding is entered into under authority of Article [25] of the [Tax Treaty] (the “Treaty”) between [State A] and [State B]. It implements the principles of Article [9] of the Treaty in the circumstances described herein. It applies to taxable years of Qualifying Enterprises ending in calendar years [20__] through [20__]. This term will be extended for another five years unless either State notifies the other, in writing, of its intent to terminate this memorandum of understanding on or prior to December 31 [20__]. Expiration of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the last day of the calendar year in which the application of this memorandum of understanding terminates.
For purposes of this memorandum of understanding, an “enterprise” means the enterprise defined in Article [3], paragraph [1] of the Treaty.
For purposes of this memorandum of understanding, an “enterprise” means the enterprise defined in Article [3], paragraph [1] of the Treaty.
For purposes of this memorandum of understanding, a Qualifying Enterprise must have each of the characteristics described in this paragraph.
For purposes of this memorandum of understanding, a Qualifying Enterprise must have each of the characteristics described in this paragraph.
A Qualifying Enterprise may not:
A Qualifying Enterprise may not:
For purposes of this memorandum of understanding, a Qualifying Transaction shall be the rendering of research and development services by the Qualifying Enterprise on behalf of an associated enterprise resident in the other Contracting State without the interposition of other transactions or parties.
For purposes of this memorandum of understanding, a Qualifying Transaction shall be the rendering of research and development services by the Qualifying Enterprise on behalf of an associated enterprise resident in the other Contracting State without the interposition of other transactions or parties.
In the event a Qualifying Enterprise elects to apply the provisions of this memorandum of understanding:
In the event a Qualifying Enterprise elects to apply the provisions of this memorandum of understanding:
Each of [State A] and [State B] agree that compensation for Qualifying Transactions calculated in accordance with this memorandum of understanding shall be deemed to constitute an arm’s length level of compensation for purposes of applying the transfer pricing rules of such State and the provisions of Article [9] of the Treaty.
Each of [State A] and [State B] agree that compensation for Qualifying Transactions calculated in accordance with this memorandum of understanding shall be deemed to constitute an arm’s length level of compensation for purposes of applying the transfer pricing rules of such State and the provisions of Article [9] of the Treaty.
The Competent Authorities of [State A] and [State B] agree that the associated enterprise that is party to a Qualifying Transaction shall not be deemed to have a permanent establishment in the jurisdiction of residence of the Qualifying Enterprise by virtue of the performance of low risk research and development services on its behalf by the Qualifying Enterprise.
The Competent Authorities of [State A] and [State B] agree that the associated enterprise that is party to a Qualifying Transaction shall not be deemed to have a permanent establishment in the jurisdiction of residence of the Qualifying Enterprise by virtue of the performance of low risk research and development services on its behalf by the Qualifying Enterprise.
A Qualifying Enterprise and the relevant associated enterprise may elect to apply the provisions of this memorandum of understanding consistently in [State A] and [State B] by filing a notice with [__] of [State A] and [__] of [State B] no later than [__] covering the Qualifying Transactions.
A Qualifying Enterprise and the relevant associated enterprise may elect to apply the provisions of this memorandum of understanding consistently in [State A] and [State B] by filing a notice with [__] of [State A] and [__] of [State B] no later than [__] covering the Qualifying Transactions.
The required notice shall include:
The required notice shall include:
Satisfaction of the election and reporting requirements of this memorandum of understanding, and reporting income calculated in accordance with its terms in a timely filed tax return for the year, shall relieve the Qualifying Enterprise and its relevant associated enterprise from the obligation to comply with the otherwise applicable transfer pricing documentation requirements of [State A] and [State B] with respect to the Qualifying Transactions.
Satisfaction of the election and reporting requirements of this memorandum of understanding, and reporting income calculated in accordance with its terms in a timely filed tax return for the year, shall relieve the Qualifying Enterprise and its relevant associated enterprise from the obligation to comply with the otherwise applicable transfer pricing documentation requirements of [State A] and [State B] with respect to the Qualifying Transactions.
A Qualifying Enterprise and its relevant associated enterprise not electing treatment of their Qualifying Transactions under this memorandum of understanding shall be subject to the application of the transfer pricing and documentation rules of [State A] and [State B] as if this memorandum of understanding were not in force.
A Qualifying Enterprise and its relevant associated enterprise not electing treatment of their Qualifying Transactions under this memorandum of understanding shall be subject to the application of the transfer pricing and documentation rules of [State A] and [State B] as if this memorandum of understanding were not in force.
All disputes with regard to the application of this memorandum of understanding shall be referred to the competent authorities of [State A] and [State B] for resolution by mutual agreement.
All disputes with regard to the application of this memorandum of understanding shall be referred to the competent authorities of [State A] and [State B] for resolution by mutual agreement.
The competent authorities of [State A] and [State B] may exchange information where necessary to carry out this agreement under the provisions of Article [26] of the Treaty.
The competent authorities of [State A] and [State B] may exchange information where necessary to carry out this agreement under the provisions of Article [26] of the Treaty.
Either Competent Authority may terminate this memorandum of understanding by providing the other with written notice of termination. The termination shall become effective [on the first day following a period of six months after the receipt of such notice] OR [on (date)]. Termination of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the effective date of termination.
Either Competent Authority may terminate this memorandum of understanding by providing the other with written notice of termination. The termination shall become effective [on the first day following a period of six months after the receipt of such notice] OR [on (date)]. Termination of this memorandum of understanding will have effect for taxable years of Qualifying Enterprises ending after the effective date of termination.