International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US and OECD harmonise approaches to arm's-length principle

Tax specialists are praising the OECD’s decision to equalise the methods for allocating income and expenses between controlled entities under the arm’s length principle.

In September 2009, the OECD released draft proposed revisions to Chapters one through three of their 1995 guidelines.

One of the most important proposed changes included the abandonment of the traditional hierarchy of transfer pricing methods.

The proposed guidelines suggested that taxpayers should instead use the method that provided the most reliable measurements.

One potential reason behind the change is that a growing number of tax authorities may have realised the difficulty multinationals face in trying to get reliable data to apply to the traditional methods.

Tax practitioners and specialists welcome the change.

“This will simplify the process of doing global documentation for large multinationals, and over time will potentially reduce the number of disputes,” said Paul Burns, counsel at DLA Piper.

“These are sensible changes that would bring the two main promulgators of the arm’s length standard, the US and the OECD, into closer harmony in the application of that principle,” said Richard Boykin, principal economist at Baker & McKenzie.

Though there is no definite date for the finalisation of these guidelines, the US Department of Treasury (Treasury) has confirmed that the proposals do abandon a strict hierarchy of methods in favour of an approach that is more similar to the one now in place at the Treasury and IRS.

The US Treasury adopted its own version of the “best method rules” in 1994.

“Tax authorities outside the US now have the benefit of 15 years of US experience with the best methods rule,” said Burns. “My sense is that they have reached a certain comfort level with this.”

“This is one area where it seems that the US is out in front leading and the OECD guidance sort of converged later to get there,” said David Ernick, associate international counsel at the Treasury, at a BNA Tax Management International Luncheon on March 31.

The proposed guidelines also contained a helpful discussion about issues of comparability. Recognising that reasonably comparable controlled transactions are often unavailable for complex multinational transactions, especially those involving intangibles, the guidelines allow for use of profit-based methods, as long as the allocation method is reliable and consistent.

This explanation about comparability will also help to bridge differences between the application of the US and OECD methods.

more across site & bottom lb ros

More from across our site

The forum heard that VAT professionals are struggling under new pressures to validate transactions and catch fraud, responsibilities that they say should lie with governments.
The working paper suggested a new framework for boosting effective carbon rates and reducing the inconsistency of climate policy.
UAE firm Virtuzone launches ‘TaxGPT’, claiming it is the first AI-powered tax tool, while the Australian police faces claims of a conflict of interest over its PwC audit contract.
The US technology company is defending its past Irish tax arrangements at the CJEU in a final showdown that could have major political repercussions.
ITR’s Indirect Tax Forum heard that Italy’s VAT investigation into Meta has the potential to set new and expensive tax principles that would likely be adopted around the world
Police are now investigating the leak of confidential tax information by a former PwC partner at the request of the Australian government.
A VAT policy officer at the European Commission told the forum that the initial deadline set for EU convergence of domestic digital VAT reporting is likely to be extended.
The UK government shows little sign of cutting corporate tax, while a growing number of businesses report a decline in investment as a result of the higher tax burden.
Mariana Morais Teixeira of Morais Leitão overviews Portugal’s new tax incentive regime designed to boost the country’s capital-depleted private sector.
Septian Fachrizal, TP analyst at the Directorate General of Taxes, outlines how Indonesia is relying heavily on the successful implementation of pillar one.