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CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Under Article 9(2) of the OECD Model, after State A makes a transfer pricing adjustment increasing the profits of its resident enterprise by Rs 50 lakh on a transaction with an associated enterprise in State B, what must State B do?

State B must make an appropriate corresponding adjustment to the tax on the doubly taxed profits, but only if it agrees that State A's adjustment is justified in principle and amount. If it disagrees, the competent authorities consult each other. It is not an automatic reduction.

  1. AMake an appropriate corresponding adjustment to tax charged on those doubled-taxed profits, if it agrees with the adjustment, consulting the competent authority if neededCorrect
  2. BAutomatically reduce its own tax by Rs 50 lakh without examination
  3. CRefuse any adjustment because only State A has jurisdiction
  4. DTax the Rs 50 lakh again at the higher rate

Explanation

Article 9(2) requires State B to make an appropriate adjustment where it agrees that State A's adjustment is justified in principle and amount; otherwise the competent authorities consult each other. The automatic reduction option ignores the agreement condition. Refusing adjustment or taxing again defeats elimination of economic double taxation.

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