Fundamentals of International Transfer Pricing in Law and Economics (MPI Studies in Tax Law and Public Finance (1), Band 1)

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The taxation of multinational corporate groups has become a major concern in the academic and political debate on the future of international taxation. In particular the arm’s length standard for the determination of transfer prices is under increasing pressure. Many countries and international bodies are now taking a closer look at the use of transfer prices for profit shifting and are exploring alternative mechanisms such as formulary apportionment for the allocation of taxing rights. With regard to this topic, this volume is the first to offer a concise analysis of transfer pricing in the international tax arena from an interdisciplinary legal and economic point of view. Fundamentals such as the efficient allocation of resources within multi-unit firms and distortions between different goals of transfer pricing as well as different aspects of it in tax and corporate law, the traditional OECD approach and practical aspects concerning intangibles, capital and risk allocation are covered by outstanding authors. 001Download PDF (291.7 KB)front-matter Fundamentals of International Transfer Pricing in Law and Economics Preface Table of Contents List of Authors 002Download PDF (43.5 KB)front-matter Part 1: The Roles and Functions of Transfer Pricing in Organisations 003Download PDF (807.9 KB)fulltext Transfer Pricing in Multinational Corporations: An Integrated Management- and Tax Perspective Abstract 1. Introduction 2. Transfers of Intermediate Products and Services 2.1 Cost-Based Transfer Pricing 2.2 Market-Based Transfer Pricing 3. Transfers of Intangible Assets 3.1 Conformity between Internal and Tax Accounting 3.2 Decoupling Internal- from Tax Accounting 4. Summary References 004Download PDF (603.1 KB)fulltext Comment on Hiemann and Reichelstein: “Transfer Pricing in Multinational Corporations: An Integrated Management- and Tax Perspectiv Abstract 1. Introduction 2. Transfer Prices between the Diverging Poles of Taxation and Economic Targets 3. Creation of “One Set of Books” versus “Two Sets of Books” Systems 4. Decoupling of Transfer Prices for Managerial and Taxation Purposes 5. Conclusions 005Download PDF (755.8 KB)fulltext Multiple Roles of Transfer Prices: One vs. Two Books Abstract 1. Introduction 2. The need for TP 2.1 A World of Solely National Companies 2.2 A World with Multinational Enterprises 2.3 Tax Differences and TP Manipulation 2.4 The (re)actions on the Part of Tax Authorities 2.5 One or Two Books? 3. An Illustrative Model 3.1 MNE Setting of TPs with Two Books 3.2 MNE Setting of TP with Merely One Book 3.3 Extention 1: Switching the High and Low Tax Countries 3.4 Extention 2: An Alternative Formulation of Detection and Fine 4. Related Literature on Multiple TPs 5. TP and Tax Reform Proposals 5.1 Cash Flow Tax19 5.2 ACE Tax 5.3 CBIT Tax 5.4 Presumptive Taxation of Capital 5.5 Common Corporate Tax Base 5.5.1 CCCTB with Formula Apportionment (FA) 5.5.2 A European Corporate Income Tax 6. Conclusions References 006Download PDF (690.6 KB)fulltext Transfer Pricing – Business Incentives, International Taxation and Corporate Law Abstract 1. Introduction 2. The Duties of the Management 2.1 Profit Maximization within a Single Corporation 2.1.1 The Choice of Business Units and the Setting of Transfer Prices 2.1.2 International Taxation and Transfer Prices 2.1.2.1 The Conceptual Difference between Business and Tax Transfer Prices 2.1.2.2 Choices for the Management in the Tax and in the Business Sphere 2.1.2.2.1 No Legal Conformity for Managerial and Tax Transfer Prices 2.1.2.2.2 Limited Conformity for Managerial and Tax Transfer Prices 2.1.2.3 Consequences for International Tax Policy 2.2 Profit Maximization in a Corporate Group 2.2.1 The Corporate Law Framework for Related-Party Transactions 2.2.2 The “Arm’s-Length” Standard under Corporate Law 2.2.3 Arm’s Length Pricing and the Group Situation 2.2.4 The Interaction of Incentives, Tax and Corporate Law for Transfer Pricing 3. Relevant Case Law 3.1 DSG Retail Limited et al. vs. HMRC 3.2 Glaxo SmithKline (Canada) 3.3 GE Capital (Canada) 4. Prioritizing the Incentive Function of Transfer Prices over Tax and Corporate Law 007Download PDF (43.4 KB)front-matter Part 2: The OECD Approach to Transfer Pricing 008Download PDF (701.9 KB)fulltext Soft Law, Hard Realities and Pragmatic Suggestions: Critiquing the OECD Transfer Pricing Guidelines Abstract 1. Introduction 2. Highlights of the Guidelines 2.1 Intentions 2.2 Structure and Notable Changes 2.3 The Arm’s-Length Principle and Global Formulary Apportionment 2.4 Profit-Based Methods 2.5 Disregarding Transactions 2.6 Intangibles 2.7 Business Restructurings 3. Soft Law 3.1 Guidelines are Guidelines 3.2 Soft Law with Powerful Influence 3.3 Importance of Soft Law 4. Hard Realities 4.1 Interpretation of Article 9 is Controversial 4.2 Transfer Pricing is a Real Problem 4.3 Synergy Rents May Not Be Taxed Anywhere 4.4 The Guidelines Take Effect via National Law 5. Pragmatic Suggestions 5.1 More “Soft law” 5.2 More Pragmatic 5.3 More Anti-Avoidance Focused 6. Conclusions 009Download PDF (739.0 KB)fulltext The OECD Approach to Transfer Pricing: A Critical Assessment and Proposal Abstract 1. Introduction 2. Economic Effects of the OECD Approach to Transfer Pricing 2.1 Tax Planning Opportunities 2.1.1 Profit Shifting 2.1.2 Effects of Profit Shifting on the Decision-Making of MNEs 2.2 Transfer-Pricing Disputes 2.2.1 Double Taxation Risk 2.2.2 Tax Compliance and Tax Enforcement Costs 2.3 Implications of the Empirical Findings 3. OECD Transfer Pricing Guidelines Revisited 3.1 General Assessment 3.2 The Lack of Comparability 3.3 Discretionary Power in Transfer Pricing 4. Amendments of the OECD Approach to Transfer Pricing 4.1 Decreasing Complexity and Discretionary Powers 4.2 A Concept to Amend the OECD Approach to Transfer Pricing 4.2.1 Attributing Profits to the Point of Sale 4.2.2 Attributing Profits to all Parties Involved 4.2.3 Abstracting from Evaluating Single Transactions 4.3 The Proposal in More Detail 4.4 Comparison of the Proposals with the OECD Approach 4.5 Comparison of the Proposed Amendments with Formula Apportionment 5. Conclusions Appendix: Empirical Evidence on Effects of the OECD Approach References 010Download PDF (649.7 KB)fulltext OECD Guidelines: Causes and Consequences Abstract 1. Introduction 2. Theoretical and Empirical Claims Made by the Guidelines 3. Particular Needs of Developing Countries 4. Why Have OECD Transfer Pricing Rules Persisted? 5. The Harm Arising from Current Transfer Pricing Rules 6. Possible Remedies 7. Conclusion 011Download PDF (693.7 KB)fulltext Reflecting on the “Arm’s Length Principle”: What is the “Principle”? Where Next? Abstract 1. Introduction 2. Concerns About the “Arm’s Length Principle” 3. The “Arm’s Length Principle,” “Intangibles,” and the TPG 4. A “Principle” In Spite of Its Fictions 5. The “Principle” Should Not Be Confused With the “Tools” 6. “Intangibles” and International Tax Jurisdiction 7. Global Effective Tax Rates and International Corporate Taxation 8. Recalibrating the “Arm’s Length Principle” 9. Over the Mountain 012Download PDF (43.3 KB)front-matter Part 3:Transfer Pricing in Practice 013Download PDF (721.9 KB)fulltext Credit Ratings and the Debt-related Costs for a Subsidiary of a Multinational Firm Abstract 1. Introduction 2. Analysis of Companies’ Credit Ratings 3. Canadian Court Opinions in General Electric Capital Canada, Inc. 3.1 Canadian Tax Court Opinion 3.2 Canadian Federal Court of Appeals Opinion 3.3 My Commentary 4. Implications for Tax Policy 4.1 Interest Expense and Guarantee Fees for a Permanent Establishment 4.2 Credit Rating as an Intangible Asset 4.3 Conclusion Appendix A Calculation of Yield Adjusted for Expected Default Loss 014Download PDF (921.5 KB)fulltext Transfer Pricing in the Courts: A Cross-Country Comparison Abstract 1. Introduction 2. Arm’s Length vs. Formulary Income Allocation Methodologies 3. Judicial Price Setting 3.1 The United States 3.2 Canada 3.3 United Kingdom 3.4 Australia 4. Analysis 4.1 The Paucity of Profit Split Cases 4.2 Accepting Structural Arrangements 5. Conclusion 015Download PDF (877.0 KB)fulltext Comments on Julie Roin: “Transfer Pricing in the Courts: A Cross-Country Comparison” Abstract 1. Introduction 2. Research Question 3. Methodological Approach 4. Results 5. Comments 5.1 General 5.2 Methodological Issues 5.3 Conceptual Issues 5.3.1 General 5.3.2 Profit Methods and Profit Split Methods 5.3.3 Profit Split Method and Formulary Apportionment 6. Conclusion 016Download PDF (43.5 KB)front-matter Part 4: Separate Accounting, Profit Split and Formulary Apportionment 017Download PDF (682.0 KB)fulltext Assessing the Normative Differences Between Formula Apportionment and Separate Accounting Abstract 1. Introduction 2. The Fundamental Economic Problem 3. Incorporating Differences in Social Preferences 4. Normative Differences between Separate Accounting and Formula Apportionment 5. Concluding Remarks References 018Download PDF (795.9 KB)fulltext Profit Split, the Future of Transfer Pricing? Arm’s Length Principle and Formulary Apportionment Revisited from a Theoretical an a Practical Perspective Abstract 1. Introduction 2. The Gaining Importance of the Profit Split Method 3. Profit Split Method and Formulary Apportionment Compared 3.1 Profit Split Method 3.2 Formulary Apportionment 3.3 Numerical Example 4. Discussion of Advantages and Disadvantages Arm’s Length Principle vs. Formulary Apportionment 4.1 Compliance Costs and Profit Shifting 4.1.1 Empirical Studies about Profit Shifting 4.1.2 Compliance Costs 4.2 Resource Allocation of Multinationals 4.3 Transition Costs for Changing from the Arm’s Length Principle to the Formulary Apportionment 4.4 Conclusion 5. How to Improve the Institutional Framework for the Application of the Arm’s Length Principle 6. Conclusion References 019Download PDF (628.9 KB)fulltext In Favor of Formulary Apportionment A Comment on Kroppen/Dawid/Schmidtke: “Profit Split, the Future of Transfer Pricing? Arm’s Length Principle and Formulary Apportionment Revisited from a Theoretical and a Practical Perspective” Abstract 1. Introduction 2. Discussion of Profit Shifting 3. Discussion of Compliance and Transition Costs 4. Discussion of Tax Distortions of Investment 5. The Missing Argument: Tax Competition 6. Concluding Remarks References