Transfer Pricing Tool
for Government

Transfer Pricing for Government: OECD Methodology

Public-sector entities are generally outside the scope of transfer pricing rules, because TP rules apply to transactions between associated enterprises that are subject to corporate income tax. Government departments, agencies, and non-commercial public bodies are typically tax-exempt and do not have related-party transactions in the TP sense. However, government-owned enterprises (SOEs) — companies that are owned or controlled by the state but operate commercially in competition with private enterprises — are generally subject to the same transfer pricing rules as private companies.

The OECD's work on SOE governance (OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015) establishes that SOEs should operate on a level playing field with private companies. This extends to transfer pricing: SOEs engaged in cross-border commercial transactions with related-party entities (other SOEs, government agencies providing subsidised inputs, or entities in the same SOE group) must price those transactions at arm's length. Examples include state-owned oil companies selling crude to related refineries, state-owned banks lending to related SOEs, and SOE groups sharing management services across borders.

A distinct category is sovereign wealth fund (SWF) portfolio companies. When a sovereign wealth fund owns stakes in multiple commercial enterprises across jurisdictions, transactions between those portfolio companies may create transfer pricing obligations. The key test is whether the SWF's level of ownership and control creates a related-party relationship under the domestic tax law of the relevant jurisdictions. This varies — in some countries, common state ownership automatically creates a related-party relationship; in others, additional factors (common management, economic dependence) must be present. Transfer pricing rules apply to the commercial entity, not to the government itself.

Recommended Method: TNMM (Transactional Net Margin Method)

For government entities, the tnmm (transactional net margin method) is typically the most appropriate transfer pricing method. This tool pre-selects this method based on industry best practice and OECD guidance. Typical arm's length ranges for government are 3–10%.

Typical Government Intercompany Transactions

Services between SOE subsidiaries — Management, IT, or technical services provided between subsidiaries of a state-owned enterprise group. TNMM or Cost Plus depending on the nature of services. Preferred method: TNMM (Transactional Net Margin Method).

Commodity sales by state-owned producers — State-owned mining, oil, or gas companies selling to related-party trading entities. CUP using published commodity prices per OECD ¶2.18–2.20. Preferred method: CUP (Comparable Uncontrolled Price).

Sovereign wealth fund portfolio companies — Companies owned by sovereign wealth funds engaging in cross-border transactions with other portfolio companies. Standard TP methods apply to the commercial entity. Preferred method: TNMM (Transactional Net Margin Method).

Regulatory Context

SOE transfer pricing is a growing focus area, particularly in resource-rich developing countries. The OECD SOE Corporate Governance Guidelines (2015) support level-playing-field treatment. BEPS Inclusive Framework countries increasingly apply TP rules to SOEs.

Limitation: This tool applies to SOEs and SWF portfolio companies subject to corporate income tax. Pure government entities not subject to corporate income tax are outside scope. Consult local tax advice to determine applicability.