OECD Transfer Pricing Guidelines Research Articles

PROBLEMS OF CLASSIFICATION AND VALUATION OF FINANCIAL ASSETS

Abstract. The article discusses the main problems of the classification and valuation of financial assets, namely, in terms of inconsistencies in the approaches proposed by the International Financial Reporting Standards (IFRS) and the OECD Transfer Pricing Guidelines. The study found that in many countries that have begun to apply International Financial Reporting Standards, there are no uniform rules for the classification, assessment and determination of the fair value of financial assets. The need to address these issues is of particular importance in the context of the development of the OECD initiative to implement the BEPS. This determined the direction of the study and allowed formulating the aim of the study, which is to develop sound proposals for further development and improvement of IFRS provisions related to the classification and valuation of the fair value of financial assets. The methodological background of the research involved an institutional approach to the study of socio-economic processes and phenomena, as well as a system of principles and methods for creating and assessing value, which is based on philosophical, worldview, general scientific and special scientific methods. The study allowed systematising and classifying financial assets according to different features and characteristics. The proposed classification of financial assets makes it possible to determine the directions for improving accounting in terms of its arrangement based on the approximation of IFRS to the OECD Transfer Pricing Guidelines. The promising areas for further research include the development of a unified procedure for determining the real value of financial assets for taxation and accounting purposes. Keywords: financial assets, economic essence, classification, assessment, financial market, fair value. JEL Classification G12, D53 Formulas: 0; fig.: 1; tabl.: 1; bibl.: 25.

Is Soft Law Making Hard Law Too Hard?

Soft laws are created for many reasons to serve various purposes. This article focuses on acts of soft law that are adopted to facilitate the process of applying hard law (or complying with it) and to standardize the understanding of international agreements. In the field of customs law, one can point, for instance, to opinions adopted by the World Customs Organisation. The Organisation for Economic Co-operation and Development (the OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the Commentary to the OECD Model Tax Convention on Income and on Capital are globally recognized examples of the tax arena. The side effects of the application of acts of soft law in the fields of tax law and customs law are presented and analysed. Interpretative problems are observed at the international level, whereas clear-cut side effects often occur domestically. customs classification – World Customs Organisation (WCO) – double taxation conventions – Organisation for Economic Co-operation and Development (the OECD) – Model OECD – OECD Transfer Pricing Guidelines – OECD Commentary – interpretation

Performance Guarantee: How to Avoid Pitfalls and Overcome Hindrances in a Transfer Pricing Analysis

Performance guarantees are a common form of support used in commercial transactions and their use within multinational enterprises has become increasingly frequent in recent years. This article assesses whether (and to what extent) the methods described in the OECD Transfer Pricing Guidelines in relation to financial guarantees can be used by analogy for the determination of the commission fee related to the provision of a performance guarantee. The authors examine the technical and operational aspects that should be carefully assessed when applying the different methods reported by the OECD to determine transfer prices in line with what third parties would have agreed upon in comparable circumstances and, therefore, with the arm’s length principle.

On the Apparent Widespread Misapplication of the OECD Transfer Pricing Guidelines

In this article, the authors examine the apparent widespread misapplication of the OECD Transfer Pricing Guidelines. Though most evident in relation to the rules on risk introduced by the OECD/G20 Base Erosion and Profit Shifting Project, it is argued that the cause stems from some wider problems with the ALP.

Arm's length principle and reference range in the OECD transfer pricing guidelines convention: A comparative study aimed at the net cost plus method

Arm's length principle and reference range in the OECD transfer pricing guidelines convention: A comparative study aimed at the net cost plus method

Is the Interaction between Chapter X of the OECD Transfer Pricing Guidelines and the EU Directive on Tax Dispute Resolution Mechanisms an Effective One?

International tax law has been developing rapidly for years. In this article, the author tests the consequences of the new chapter X of the OECD Transfer Pricing Guidelines against the EU Arbitration Directive and the Dutch Tax Arbitration Act. He concludes that, because the Directive does not cover differences in qualification, various situations will fall between two stools.

On the European Commission’s Understanding of the Arm’s Length Principle in International Taxation versus State Aid Matters

The European Union is bound to a duty of consistency between its internal policies and external action and a duty of sincere cooperation with its Member States. When addressing the status of the OECD Transfer Pricing Guidelines and the OECD arm’s length principle, the European Commission has adopted two different views: one in matters of domestic income taxation of third states and its Members, and another dealing with EU State aid. This article addresses the consequences of such behaviour. It concludes that the aforementioned duties require the European Commission to deem the OECD Transfer Pricing Guidelines as the only possible implementation of the arm’s length principle when addressing State aid transfer pricing matters. The European Commission can, however, still decide to engage Member States to further its positions on the matter in order to develop the understanding of the arm’s length principle and the OECD Transfer Pricing Guidelines at the OECD level.

Case SAC 2021:66 on Group Internal Financing – Supreme Administrative Court Provides Lessons on How the OECD Transfer Pricing Guidelines Should and Should Not Be Used

In case SAC 2021:66, the Finnish Supreme Administrative Court held that the cost-plus method was the most suitable method in a setting where a Finnish parent company provided centralized financing to its foreign subsidiaries. This article analyses how the Court’s approach and the outcome of the case align with the OECD Transfer Pricing Guidelines and with the Court’s earlier case law on group internal financing. It also discusses the problems that may arise if the courts, instead of practical and tailor-made reasoning, give the text of the OECD Guidelines a law-like role.

Blockchain and Smart Contracts: A Look at the Future of Transfer Pricing Control

This article aims to outline the path towards the future of transfer pricing (TP) control by exploring the new possibilities of blockchain and smart contracts and their potential impact on the international and European policy debate. After the introduction of some preliminary concepts, the first outcome is the identification of a uniform methodology for coding advance pricing agreements (APAs) into smart contracts in which conventional elements properly match with computer language components. Despite the challenges of the coding process and the issue of legal prose, the research also approaches the dynamics and the different stages of a new smart system for TP control. Furthermore, the analysis covers the policy perspective and explores how the new technology could improve the outcomes of the recent OECD and European Commission initiatives in the area of TP. Ultimately, the study suggests the adoption of uniform rules for coding APAs into smart contracts and the establishment of an international consortium blockchain. However, other factors will also be crucial for the implementation of the new system including the collection of sufficient supply chain data and the adoption of an interdisciplinary approach that is open to software engineering and data science. Transfer pricing, advance pricing agreements, blockchain, smart contracts, real-time monitoring, artificial intelligence, data analytics, digital economy, OECD Transfer Pricing Guidelines, convention on mutual administrative assistance in tax matters.

Contractual Allocation of Risks and Substance: The Acer Case

In this article, the author undertakes a thorough examination of the landmark Spanish transfer pricing Acer decision. The case refers to the denial of the deductibility of payments resulting from factoring agreements undertaken by Acer Spain – a limited risk distributor – with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Through a disputable interpretation of the limited risk agreement signed between Acer Spain and its principal Acer Europe, tax resident in Switzerland, the tax authorities and the National Court disregarded the allocation of said risk to Acer Spain. The Court neglected to analyse the case through the lens of the OECD Transfer Pricing Guidelines, confirmed a tax assessment that inexorably led to double taxation and gave its blessing for the use of transfer pricing rules as a general anti-abuse mechanism.

The OECD Pillar 1 Blueprint: Why Amount B Matters

In this article, the authors consider the importance of Amount B in the package of measures in the OECD Pillar 1 Blueprint, the degree of existing support in the OECD Transfer Pricing Guidelines for the use of multi-territory and industry-wide comparables and the potential relevance of different profit level indicators.

2020 Documenting Transfer Pricing under Pandemic Circumstances

The author addresses the COVID-19 transfer pricing challenges, covering the steps for analysing transfer pricing implementation, documentation processes and adjustments in 2020. The present article is based on the OECD Guidance on the transfer pricing implications of the COVID-19 pandemic and the OECD Transfer Pricing Guidelines 2017.

Tax Complexity, Tax Certainty, and the Pillar One and Two Blueprints Submission to the OECD Centre for Tax Policy and Administration in response to the Public Consultation Document on the Reports on the Pillar One and Pillar Two Blueprints, December 14, 2020

A key motivation underlying the October 2020 OECD Pillar One and Pillar Two Blueprints is the goal of reducing tax complexity for taxpayers and tax authorities. In this article, we assess the tax complexity of the Blueprints relative to the 2017 OECD Transfer Pricing Guidelines (TPG) and the 2017 United Nations Transfer Pricing Manual (TPM). We focus on one form of tax complexity, rule complexity, which measures the problems faced by taxpayers when interpreting written and unwritten tax rules. We use a novel method drawn from the literature on the complexity of algorithms and software to assess the tax complexity of the Blueprints relative to the TPG and TPM. Our analysis shows that, overall, both Blueprints exhibit greater tax complexity than either the TPG or TPM, with Pillar One being the most complex and the TPG the least complex of the four documents. We conclude with some policy recommendations for reducing tax complexity. This article is a revised version of Complexity, Tax Certainty, and the Pillar One and Two Blueprints, which was submitted by the authors to the OECD Centre for Tax Policy and Administration in response to the Public Consultation Document on the Reports on the Pillar One and Pillar Two Blueprints on December 14,2020.

Compatibility between the OECD’s Hard-to-Value Intangibles Methodology and the Arm’s Length Standard: What Is the Way Forward?

This article studies the compatibility between the hard-to-value intangibles (HTVIs) methodology adopted by the OECD Transfer Pricing Guidelines (OECD TPG) 2017 and the arm’s length standard (ALS). This new methodology provides tax administrations with a useful tool for dealing with the information asymmetry problem in relation to taxpayers when assessing transactions involving intangibles for which the valuation is highly uncertain. However, certain features of this new approach may contradict the ALS as enshrined in article 9(1) of the OECD Model and, consequently, as internalized at a domestic level within the income tax law and tax treaty network of many jurisdictions around the world. In this context, this article provides a comprehensive analysis of the OECD’s HTVIs methodology, from its conception in the United States to its final incorporation within the TPG, the tensions with the ALS that may lead to normative conflicts in different jurisdictions, and, lastly, the possible solutions that could amend this discrepancy.

In-Depth Analysis of the Concept of Control over Risk

With the 2017 revision of the OECD Transfer Pricing Guidelines, the OECD employs the “concept of control over risk” as the turning point in determining whether or not an associated party contractually assuming risks is entitled to receive the higher returns associated with such risks. This article provides a historical context for the concept of control over risk and critically evaluates it over risk from a tax policy, general arm’s length as well as international corporate tax framework perspective.

The Virus in the ALP

In this article, the authors consider various policy, technical and practical implications of the transfer pricing guidance on risk and capital in the light of the COVID-19 pandemic, with special reference to the OECD Transfer Pricing Guidelines and the arm’s length principle.

The impact of countries' transfer pricing rules on profit shifting

PurposeThis study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on specific transfer pricing provisions on the assumption that larger penalties and more extensive information requirements imply higher tax enforcement. This assumption carries limitations related to the impact of transfer pricing rules in different countries and to the interaction of different tax rules. Instead, the authors propose a nonordered segregation of groups of countries with different transfer pricing rules, and they empirically investigate the impact of these transfer pricing rules on the profit-shifting behavior of firms.Design/methodology/approachThe authors apply the hierarchical clustering method to analyze 57 observable quantitative and qualitative characteristics of transfer pricing rules of each country. This approach allows the creation of groups of countries based on a comprehensive set of regulatory characteristics, to investigate evidence of profit shifting for each of these separate groups. Profit-shifting behavior is measured by the variation in the volume of import and export transactions between local firms and related parties located in other countries.FindingsThe results indicate that firms have a higher volume of intrafirm transactions with related parties located in countries with a lower tax rate. This result is consistent with the profit-shifting hypothesis. Moreover, the results show that relevant differences in transfer pricing rules across countries produce different effects on the volume of intrafirm transactions. The authors observe that the existence of domestic transfer pricing rules that override the OECD Transfer Pricing Guidelines may inhibit profit shifting. In addition, the results suggest that the OECD guidelines may facilitate profit shifting. Overall, it is observed that some transfer pricing rules may be more effective than others in curbing profit shifting and that firms are still able to manipulate transfer prices under some tax rules.Research limitations/implications(1) The authors focus on the Brazilian context, which provides a suitable set of profit-shifting incentives for the analysis, since it combines an extreme corporate tax rate, a highly complex tax system, and a unique set of transfer pricing rules. (2) Profit-shifting behavior is captured by the volume of intrafirm transactions. The authors would prefer to observe the transfer price directly; however, this information is not disclosed by firms, for it may represent a limitation to the investigation. Nonetheless, theory shows that the profit-shifting behavior is reflected by the manipulation of both transfer prices and intra-firm outputs.Practical implicationsThe authors find that the volume of intrafirm transactions may decrease or increase, depending on the transfer pricing system of the foreign country (including the tax-differential effect). It suggests that some transfer pricing rules are more effective than others in curtailing the profit-shifting behavior and that firms are still able to find vulnerabilities in current rules and take advantage of them in deploying a profit-shifting strategy.Social implicationsResults provide knowledge about how key differences on transfer pricing rules across countries influence the profit-shifting behavior. The results of the study may have valuable application in solving regulatory mismatches, to eliminate blind spots in transfer pricing rules and thus to contribute to the current review of OECD guidelines and to the global tax reset movement.Originality/valueRecent studies suggest that if tax-avoidance incentives are somewhat weak, it becomes difficult to observe the shifting behavior of firms. The puzzle is to check whether profit shifting is nonexistent under weak incentives or whether this is a matter of methodological limitations. The authors’ analysis is applied to a complex tax background with strong profit-shifting incentives; thus, it allows the authors to obtain robust evidences of the shifting behavior and the effect of different transfer pricing rules.

Classification of transfer pricing systems across countries

This paper analyses the characteristics of transfer pricing (TP) rules across countries to create a classification of TP systems based on regulatory similarities. We apply hierarchical clustering method for the analysis of 57 qualitative and quantitative TP characteristics. Our sample comprises 44 countries for the period of 2010–2016. Our results indicate the existence of four distinct TP systems. The largest group is composed of countries with TP rules that are consistent with the OECD TP guidelines, while the other three groups include countries with domestic provisions that are substantially different from the baseline OECD standards. Overall, characteristics related to the priority of TP methods, to advanced pricing agreements and to the efficiency of competent authority procedures are the most relevant differences among groups. Simple applications of our TP classification indicate a systematic association between TP systems and income tax rates, suggesting a trade-off with respect to governments’ policy preferences between TP rules vs. tax rates. Our analysis contributes to the current literature as it provides a non-ordered classification of TP systems that is significative and consistent for the complete period, and has the advantage of being more robust methodologically and not depending on assumptions about the enforcement of specific tax provisions. Our results provide relevant information about the key differences on TP rules across countries and thus support the review of existing anti-shifting mechanisms as proposed by the OECD.

Defenders of the status quo: making sense of the international discourse on transfer pricing methodologies

Over a third of international trade happens within, rather than between, corporations. This makes establishing transfer prices – the price of transactions within and between related corporations – pivotal, as it defines corporations’ tax bills. Tax authorities worldwide follow the OECD transfer pricing guidelines and its accompanying methods for taxing corporations. This despite the guidelines’ well-documented weaknesses and even though alternative and potentially simpler methods exist. Existing literature helps explain why the OECD guidelines continue to dominate but not how those in favor of the status quo will go about defending them. We offer a novel, theory-based framework, to explain how supporters of the status quo – the epistemic community – will respond, using a combination of strategies targeting the policy discourse but also policy makers, in an effort to bolster the legitimacy of the OECD guidelines. We use discourse network analysis to study the debate on simplified transfer pricing methods from 1995 to 2018 and the positions of actors engaged. Our data confirms that the epistemic community deploys a hypothesized mix of strategies to ensure the durability of the OECD guidelines and accompanying methods, at the same time undermining the position of alternative approaches.

OS ECJ-TF 1/2020 on the General Court Decisions of 24 September 2019 in The Netherlands v. Commission (Starbucks) (Joined Cases C-760/15 and T-636/16) and Luxembourg v. Commission (Fiat Finance and Trade) (Joined Cases T-755/15 and T-759/15), on State Aid Granted by Transfer Pricing Rulings

This article provides a comprehensive exame of the decisions of the EU General Court in the cases The Netherlands v. Commission (Starbucks) (Joined Cases C-760/15 and T-636/16) (hereinafter Starbucks NL) and Luxembourg v. Commission (Fiat Finance and Trade) (Joined Cases T-755/15 and T-759/15) (hereinafter Fiat), decided on 24 September 2019. These are the first in a series of expected decisions concerning the legality of the European Commission's decisions considering certain transfer pricing rulings granted by Member States to multinational enterprises (hereinafter MNEs) to constitute State aid. The GC reached different verdicts in the two cases. Whereas in Starbucks NL it annulled the Commission's decision, in Fiat, it upheld it, ordering Luxembourg to recover the aid. Despite the different outcomes, the decisions have several commonalities in terms of how the GC interpreted the applicable European law on State aid in respect of tax matters. Therefore, they may provide an indication of how the GC will decide similar pending cases. In addition, the decisions are of paramount importance in understanding: (i) the role and limits of the Commission in reviewing rulings granted by Member States; (ii) the role of the OECD's arm's length concept and of the OECD Transfer Pricing Guidelines (2017) (the OECD Guidelines) in assessing the Treaty on the Functioning of the European Union's (TFEU) (2007) prohibition of State aid; and (iii) the level of evidence that has to be provided by the parties in these procedures. The importance of these two decisions cannot be emphasized enough. Although the Commission has apparently decided not to appeal the Starbucks NL decision, the appellants in Fiat will do so, thus seeking a final resolution from the Court of Justice of the European Union (ECJ). The latter is not bound to follow the GC and may decide the matter on points on law in a way that deprives the current decision of its jurisprudential value. It follows that the GC would have to follow the ECJ's reasoning in future decisions as to the interpretation of EU law on State aid. In the meantime, however, these GC decisions are the best guidelines that MNEs and Member States have (and will have in the near future) concerning the admissibility of their TP rulings in light of the EU State aid rules. Given the length of the two decisions and the number of topics covered, the article only focuses on issues considered to be of interest in understanding the GC's reasoning and the impact of the cases.