In an interview with International Tax Review, Pascal Saint-Amans suggests that the OECD’s approach to transfer pricing is “disputed and sometimes contested by people who don't really get it right”. We welcome the appointment of Pascal, who has always made an effort to reach out to civil society organisations, to the OECD’s top position at a time when tax and development is rising up the global agenda. But his comments somewhat mischaracterise an important debate.
Development NGOs such as ActionAid have invested a lot of time in engaging with tax officials from developing countries. We understand that building transfer pricing capacity is the immediate priority, especially in Africa; we also appreciate that many countries will prefer to do this on the basis of the OECD guidelines, because they are currently the pre-eminent international standards. But we also know that we are not the only ones to question the guidelines’ long-term suitability for developing countries.
First, it is important to recognise that transfer pricing, the arm’s length principle and the OECD guidelines are three different things. The OECD standards propose several ways to determine the arm’s length price (ALP), and represent one approach to transfer pricing. But the OECD does not have a monopoly on transfer pricing or the ALP – just ask the Brazilians.
It is perfectly possible to believe in transfer pricing, and indeed in the ALP, but to think that the OECD guidelines may need to be adapted to the resource-constrained context of an African revenue authority. This is one of the issues with which the UN Committee of Experts is grappling in the drafting of its practical manual on transfer pricing. I have heard strong support for this perspective from many African quarters, along with an insistence that the adoption of transfer pricing standards is a matter of national tax policy, to be made by each state itself.
Second, it is not the OECD’s role to reconcile the interests of OECD members and of developing countries. The existence of two model tax conventions – maintained separately by the UN and OECD – is an acknowledgement that these interests do not always coincide. The OECD’s report on attribution of profits to permanent establishments is frequently singled out by African revenue officials as an example of a step too far away from the taxing rights of source countries, and has been rejected in the recent update of the UN model convention for precisely this reason. My impression is that many also question whether, in the longer term, a similar balancing might not be necessary with regards to transfer pricing standards.
As should already be clear, the characterisation of the transfer pricing debate as between those who favour OECD standards and those who advocate formulary apportionment overlooks much of the current discussion. But Pascal’s advice to developing countries to “be cautious about the white man” who advocates formulary apportionment is also wide of the mark. I recently attended a meeting at the OECD on transfer pricing capacity building, at which only one person brought up the topic of formulary apportionment. It was not a white man, or indeed an NGO participant, but a woman from an African tax authority.
There is much important work to do on tax and development, and I consider the OECD secretariat an important partner which is already doing a lot of good work. For NGOs, however, the long-term objective is for developing countries to participate, on an equal footing, in the formulation of international tax standards. The first step towards this is to admit that the OECD does not have all the answers.
