Transfer Pricing Guidelines Research Articles

Obračun transfernih cena - teorijske i praktične implikacije na rezultat

Obračun transfernih cena - teorijske i praktične implikacije na rezultat

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.

Saudi Arabia Publishes New Transfer Pricing Guidelines for Qualified Taxable Persons

On 30 May 2020, Saudi Arabia published new transfer pricing (TP) guidelines to provide insight and guidance concerning the TP practice in Saudi Arabia based on the application of the TP Bylaws. In this article, the author summarizes those TP guidelines with the objective of updating the qualified taxable persons regarding their legislative and administrative responsibilities under the TP regulations and to enable them to better understand the TP regulatory framework and TP documentation requirements in Saudi Arabia.

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.

The Use of Paragraphs 1.119 to 1.128 of the 2017 OECD Transfer Pricing Guidelines for the Application of Transfer Pricing Rules

This article aims to analyse the paragraphs 1.119 to 1.128 of the 2017 OECD Transfer Pricing Guidelines and their relation to the comparability analysis, sham transactions and domestic anti-avoidance rules. For this purpose, the authors discuss the nature of the transfer pricing rules, the limits of the OECD transfer pricing guidelines to the application of transfer pricing rules and the main features of the comparability analysis, sham transactions and the anti-avoidance rules. It is concluded that part of these paragraphs contains recommendations that exceed the purpose of the transfer pricing rules when they are structured over the arm’s length principle. OECD Transfer Pricing Guidelines, arm’s length principle, transfer pricing rules, comparability analysis, sham transactions, anti-avoidance rules.

Related Parties as Used in Transfer Pricing

The paper examines the scope of related party transactions falling under the OECD Transfer Pricing Guidelines (TPG) and the transfer pricing regimes of selected tax jurisdictions. The OECD TPG does not deal with the concept of associated enterprises as used in Article 9 of the OECD Multilateral Tax Convention (MTC), while Article 9 of the OECD MTC does not define the terms used to describe associated enterprises. This gives rise to the question of what exactly was intended for under the scope of Article 9 and its consequent applicability. At the same time, many jurisdictions define related party transactions for transfer pricing purposes using the concept of “control”, but countries may perceive “control” from different perspectives. The paper discusses the practical implications arising from such differences in specific scenarios, e.g. joint ventures, family owned companies, comparability and country-by-country reporting. The “closely related” concept proposed under BEPS Action 7 is also discussed. Finally, the paper concludes with some recommendations to resolve these issues. Given the increasing focus on transfer pricing, more transfer pricing disputes are expected and correspondingly a greater use of Article 9 to eliminate economic double taxation. This intensifies the need for clarity on the scope of Article 9. It would also be timely to review the scope in light of the changes that are being made to the OECD TPG.

The Status of the OECD Transfer Pricing Guidelines in the Post-BEPS Dynamic

Despite the vast literature on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), its status has received little consideration. The image in the literature is that the OECD Guidelines is a significant publication, given the substantial cross-border trade between associated enterprises. In the OECD/G20 BEPS Project, the Final Report on Actions 8-10, published in 2015, revised the OECD Guidelines as part of the sweeping measures to counter aggressive tax avoidance by certain multinational enterprises (MNEs), such as Google LLC, Facebook Inc. and Apple Inc. BEPS Actions 8-10, inter alia, revised the guidance on intangibles and cost contribution arrangements to prevent profits from intangibles being allocated to low-tax jurisdictions. As anticipated, the OECD has reported that transfer pricing disputes are rising. In particular, BEPS Action 14, on dispute resolution, requires tax treaties to include article 9(2) of the OECD Model Tax Convention, on corresponding transfer pricing adjustments, in tax treaties. Moreover, BEPS Action 14 (element 1.1 of the minimum standard) requires that access to the mutual agreement procedure be available for transfer pricing cases in tax treaties and that countries implement the resulting mutual agreements. As a minimum standard, members of the Inclusive Framework are obliged to implement this measure, which further elevates the status of the OECD Guidelines, as resulting disputes will be resolved on the basis of the principles in the OECD Guidelines. The membership of the Inclusive Framework exceeds 135 countries. As there is a dearth of transfer pricing case law, the consequence is that courts have only established limited jurisprudence on the topic. One Australian transfer pricing case concluded that the OECD Guidelines had no formal status in treaty interpretation. It is asserted in this article that the OECD Guidelines is part of the Commentary accompanying the OECD Model Convention on Income and on Capital. Even so, it is argued that treaty countries should not only use the OECD Guidelines as a guidance document in their domestic rules, but expressly state in their tax treaties that the OECD Guidelines are to be used for the interpretation of the associated enterprises article. In addition, the treaty statement should specify whether the static or ambulatory approach should be applied. This article asserts that the best way forward is for the OECD to illuminate the status of the OECD Guidelines by including a clear statement in the Commentary on the intrinsic character of the OECD Guidelines and expressly identify which parts of the OECD Guidelines form part of the Commentary, adapting the approach taken in the Commentary on the business profits article incorporating the 2010 Report on the Attribution of Permanent Establishments.

OECD Transfer Pricing Guidelines as a Quasi Source of Law in a Post-BEPS World – Legislative and Judicial Developments from a Polish Perspective

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are of the utmost importance in the sphere of transfer pricing. Unlike article 9 of the OECD Model, which is rather general in wording, the OECD Transfer Pricing Guidelines offer a detailed guidance on transfer pricing methodology. The significance of the OECD Transfer Pricing Guidelines became even more noticeable when the BEPS Project was completed, because numerous changes to the global transfer pricing regime were envisaged in the amended guidelines and not in the text of the OECD Model itself. The aim of this article is to analyse the status of the OECD Transfer Pricing Guidelines in international and Polish domestic law, as well as current practice of their application.

Taxing the Transfer of Intellectual Property: Reporting, Auditing, and Revaluation

This study creates and analyzes a model in which IP is sold to a related entity in another country. The model focuses on the taxpayer’s reporting strategy and the tax authority’s audit strategy under two ways of using the future realized value of the IP to evaluate the transfer price, which I label the direct and revision methods. The direct method is favored by the U.S. Treasury Regulations under the commensurate with income standard. The revision method is permitted by the OECD transfer pricing guidelines. The direct method induces a more aggressive auditing strategy by the tax authority and a more conservative reporting strategy by the taxpayer compared to the revision method This in turn results in both strictly higher expected revenues and higher expected audit costs for the tax authority under the direct method compared to the revision method.

Simplifying the Transfer Pricing Analysis: An Illusory Chimaera or a Realistic Ambition?

This article focuses on simplification measures and clarification of transfer pricing analysis based on the application of the arm’s length principle throughout the four-step approach analysis depicted in the OECD Transfer Pricing Guidelines (2017). The article aims at analysing which steps of the transfer pricing analysis can be simplified and which would still need a detailed arm’s length analysis to reach their objective.

Policy Forum: Implicit Support and Its Implications on Guarantee Fee Pricing: Fact or Fiction

In recent discussions as part of the Base Erosion and Profit Shifting (BEPS) initiative, the OECD has raised a number of questions regarding financial transactions relied upon in an intragroup context. These include questions on determining the shadow credit rating, implicit support, and data to be relied upon when evaluating the arm’s length nature of financial transactions. (OECD, Public Discussion Draft Financial Transactions, BEPS Actions 8–10, (3 July – 7 Sept. 2018), https://www.oecd.org/tax/transfer-pricing/BEPS-actions-8-10-transfer-pricingfinancial- transactions-discussion-draft-2018.pdf (accessed 29 July 2019).) More recently, comments by an OECD representative have asserted that a compromise between OECD members on the issue had been reached. (See comments made on 4 June 2019 by Tomas Balco (Head of the Transfer Pricing Unit, OECD Centre for Tax Policy and Administration) during the OECD International Tax Conference in Washington DC. See J. Martin, Agreement reached on OECD transfer pricing guidelines for financial transactions, official says, MNE Tax (8 June 2019), available at (accessed on 29 July 2019).) In this respect, the OECD acknowledges that Article 9 is relevant, but confirms that domestic law has priority, except to the extent that domestic provisions discriminate. This ongoing discussion demonstrates the complexity that tax payers and tax administrators face when considering financing arrangements. Although the focus of this article is on intra-group financial guarantees in a broad sense, it focuses attention on of implicit support, a concept potentially relevant to all intra-group financial transactions. This article will also consider some of the issues currently discussed in the context of intra-group financing, including the importance and impact of implicit support on financing arrangements, from the viewpoint of tax courts, the OECD, and financial market participants. It then considers approaches used to determine the extent, if any, of implicit support by the main credit rating agencies as well as other financial market participants, and it goes on to consider the pros and cons associated with different pricing methods to assess the arm’s length level of guarantees, once credit ratings adjusted for implicit support have been derived.

Boiling Starbucks’ Roasting Down to the Essence of its Residual

The crux of the legal issue is the EU Commission’s contention, required as the third condition for a finding of State aid, that the Netherlands-Starbucks APA conferred a selective advantage on Starbucks' Netherlands manufacturing subsidiary (SMBV, aka the “roasting operation”) that resulted in a lowering of SMBV’s tax liability in the Netherlands as compared with what SMBV would have paid under the Netherlands’ general corporate income tax system dealing with third parties. And the crux of the dispute that determines the legal issue outcome is whose choice of transfer pricing method (the Commission or The Netherlands/Starbucks) is the most reliable. However the most interesting aspect of the controversy is how to allocate the residual between SMBV and Starbucks intermediary IP management limited partnership? In a broader framework, not part of the analysis contemplated by the applicable 1995 OECD Transfer Pricing Guidelines, is how to allocate the residual among Starbucks’ global value chain. This paper, currently a working draft, will eventually address the last two issues.

Zambia’s First Transfer Pricing Case: An Opportunity Lost to Use the Updated OECD and UN Transfer Pricing Guidelines for Developing Countries

The first Zambian transfer pricing court case was decided on 28 March 2019 by the Income Tax Appeals Tribunal in Lusaka. The author, in this article, considers the reasoning and the findings of the case and makes some observations regarding its implications.

Central Procurement Operating Models in a Multinational Group

This article analyses the transfer pricing considerations in relation to a central procurement operating model, in line with the OECD Transfer Pricing Guidelines (2017) and the recommendations from the OECD’s Base Erosion and Profit Shifting (BEPS) Project. The analysis also addresses the arm’s length approach to allocate joint efficiencies within a multinational group. It furthermore takes into account the specific court cases and subsequent transfer pricing decrees in the Netherlands related to these central procurement structures.

Towards a Comprehensive Transfer Pricing Framework to Foster Tax Compliance in Egypt

A comprehensive framework for transfer pricing is essential to ensure MNEs’ compliance with transfer pricing legislation and guidelines. The transfer pricing framework in Egypt at present is incomprehensive because of the lack of compendious transfer pricing guidelines and because the tax administration does not have sufficient resources and capacity. To amend this, it is necessary to issue comprehensive transfer pricing guidelines in a timely manner; to build the tax authorities' transfer pricing capacity; to extend the usage of information technology; and to introduce safe harbour measures in order to simplify transfer pricing provisions and minimize the compliance burden and costs.