Commercial transactions between different parts of a multinational group may not be subject to the same market forces shaping relations between two independent firms. Transfer prices - payments from one part of a multinational enterprise for goods or services provided by another - may diverge from market prices for reasons of marketing or financial policy, or to minimise tax.

To ensure that the tax base of a multinational enterprise is divided fairly, it is important that transfers within a group should approximate those which would be negotiated between independent firms. This ‘arm's length principle' is set out in Article 9 of the OECD Model Tax Convention.

Guidelines as to how this principle should be put into practice were issued in 1979, and were substantially revised and up-dated in 1995. In particular, much new material was added on comparability (how to tell if a transfer between independent firms is really similar to a transfer within a group) and transfer pricing methods, including profit methods.

Technological change and financial deregulation have dramatically globalised financial markets. Financial firms have organised themselves to sell financial products 24 hours a day. This phenomenon of global trading challenges taxpayers and tax administrations to come up with a fair way of allocating and taxing the profits in each country where global trading is carried on.

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