Article 9 - ASSOCIATED ENTERPRISES

   Article 9 incorporates into the Convention the general
arm's-length principles reflected in the U.S. domestic transfer

pricing provisions. It provides that when associated enterprises

(i.e., related persons described in subparagraphs 1 a) and 1 b)) engage in transactions that are not at arm's length, the Con­

tracting States may make appropriate adjustments to the taxable
income and tax liability of such enterprises to reflect the
income these enterprises would have earned or the tax for which
they would have been liable had the transaction between them been

at arm's length.

Paragraph 1

   Paragraph 1 deals with the circumstance where an enterprise
of a Contracting State is related to an enterprise of the other
Contracting State, and the enterprises make arrangements or

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impose conditions in their commercial or financial relations
different from those that would be made between independent
persons. Under these circumstances a Contracting State may
adjust the income (or loss) of its residents to reflect the
income that would have been earned in the absence of such a
relationship.

   The paragraph specifies what the term "associated enter­
prise" means in this context. An enterprise of one Contracting
State is associated with an enterprise of the other Contracting
State if it participates directly or indirectly in the manage­
ment, control, or capital of the other. Two enterprises also are
associated if there is a "brother-sister" type connection between
them in that a third person or persons participate directly or
indirectly in the management, control, or capital of both. The
term "control" includes any kind of control, whether or not
legally enforceable and however exercised or exercisable.

   The fact that a transaction is entered into between such
related enterprises does not, in and of itself, mean that a

Contracting State may adjust the income (or loss) of one or both
of the enterprises under the provisions of this Article. If the
conditions of the transaction are consistent with those that
would be made between independent persons, the income arising
from that transaction should not be the subject of adjustment
under this Article.

   Similarly, the fact that associated enterprises may have
concluded arrangements, such as cost sharing arrangements or
general services agreements, is not in itself an indication that
the two enterprises have entered into a non-arm's-length transac­
tion that should give.rise to an adjustment under pararaph 1.
Both related and unrelated parties enter into such arrangements

(e.a., joint venturers may share some development costs). As
with any other kind of transaction, when related parties enter

into an arrangement, the specific arrangement must be examined to
see whether or not it meets the arm's-length standard. In the
event that it does not, an appropriate adjustment may be made,
which may include modifying the terms of the agreement or
recharacterizing the transaction to reflect its substance.

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   Paragraph 2

   The adjustments allowed by the provisions of paragraph 1 can
give rise to taxation of the same income by both Contracting
States in the hands of the two related parties. To address this
potential double taxation, paragraph 2 provides that where a
Contracting State has made an adjustment to the profits of an
enterprise of that State that the other State agrees is consis­
tent with the provisions of paragraph 1 (i.., that was appropri­
ate to reflect arm's length conditions), the other State will
make a corresponding, or correlative, adjustment to the tax
liability of the associated enterprise resident in that other
State. The Contracting State making such an adjustment will take
the other provisions of the Convention, where relevant, into
account. For example, if the United States makes an adjustment
under paragraph 1 that increases the income of a U.S. parent

corporation, and Turkey, under paragraph 2, makes a correlative

adjustment to the income of the Turkish subsidiary, the effect of
the correlative adjustment may be to treat the Turkish subsidiary
as having made a distribution of profits to its U.S. parent
corporation, in which case the provisions of Article 10 (Divi­
dends) will apply, and Turkey may impose a withholding tax on the
dividend. The rate of the tax will be determined by the provi­
sions of Article 10. The competent authorities are authorized to
consult, if necessary, to resolve any differences in the applica­
tion of these provisions. For example, there may be a disagree­
ment over whether an adjustment made by a Contracting State under
paragraph 1 was appropriate.

   Relation to other articles and the Code

   Paragraph 2 of Article 25 (Mutual Agreement Procedure)
explains that the corresponding adjustment by the other Con­
tracting State called for by paragraph 2 of Article 9 will not be
prevented by a domestic statute of limitations or other procedur­
al limitation, as long as the competent authority of that other
State receives notification of the case within five years of the
taxable year to which the case relates.

   The saving clause of paragraph 3 of Article 1 (Personal
Scope) does not apply to paragraph 2 of Article 9 (see the

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exceptions to the saving clause in subparagraph a) of paragraph 4
of Article 1). Thus, even if the statute of limitations has run,
or there is a closing agreement between the Internal Revenue
Service and the taxpayer, a refund of tax may be required in
order to implement a correlative adjustment arising under para­
graph 2 of Article 9. Statutory or procedural limitations,
however, cannot be overridden to impose additional tax because,
under paragraph 2 of Article 1, the Convention cannot restrict
any statutory benefit.

    It is understood that this Article does not replace but
rather complements adjustments provided for under internal law

provisions of the Contracting States. Such adjustments -- the

distribution, apportionment, or allocation of income, deductions,

credits or allowances -- are permitted even if they are different

from, or go beyond, those authorized by paragraph 1 of the
Article, so long as they accord with the general principles of
paragraph 1, i-.c, that the adjustment reflects what would have
transpired had the related parties been acting at arm's length.
This Article also permits tax authorities to deal with thin
capitalization issues. They may, in the context of Article 9,
scrutinize more than the rate of interest charged on a loan
between related persons. They also may examine the capital

structure of an enterprise in determining whether a' related party loan would have been made at arm's length, whether a payment in respect of that loan should be treated as interest, and, if it is

treated as interest, under what circumstances interest deductions
should be allowed to the payor. As discussed in the Commentaries
to Article 9 of the OECD Model, this understanding is consistent
with the views of most OECD member countries.