The OECD transfer pricing guidelines, which are based on the arms-length principle, came in for some criticism from a panel that included TP Ostwal, an Indian lawyer and member of the UN tax committee, which approved a manual last month to help developing countries implement transfer pricing policies, and David Spencer, senior adviser to the Tax Justice Network, a research and advocacy organisation. The OECD was invited to send a representative, but was unable to do so.
Kari Pahlman, the head of transfer pricing for KPMG in Asia, who chaired the session, set the scene by referring to how discussion of transfer pricing had widened in recent years from one that only taxpayers, advisers and tax authorities were interested in to one that also included the public, international bodies, such as the World Bank, and non-governmental organisations (NGOs)
He added the list of topics under discussion had also increased and now included tax transparency and the position of transfer pricing within it, the public backlash against transfer pricing and the tensions between developed and developing countries on transfer pricing.
Criticism of the arms-length principle seems to lie in the fact that multinational enterprises are different from independent parties, said Pahlman.
Risk is related to functions and assets and is not detachable, said Ostwal.
Pahlman asked whether taxpayers could look forward to global harmonisation on transfer pricing or if they were facing up to institutional double taxation.
Its clear the arms-length principle is under attack. There is a vicious struggle going on between the OECD, which is intent on imposing rules, and other countries who are resisting, Spencer said, adding that he was not convinced that independent parties operate similarly to multinational companies. Complying with the arms-length principle requires multinational companies to price transactions with entities in the same group as if they were between independent parties.
Spencer said that in chapter 10 of the UN manual, which covers country practices, all the members of the BRICS (Brazil, India, China, Russia and South Africa) group of countries had questioned the availability of comparables that would allow such compliance.
Ostwal said the chapter on comparability was at the heart of the UN manual. He added that it discussed key concepts such as location savings, or the net cost savings a multinational makes by moving operations from a high-cost to a low-cost jurisdiction.
Countries speak out
Ostwal explained the background to the inclusion of chapter 10 in the UN manual. He said it started as Brazil wanting to put its approach to transfer pricing into the document. China, India and South Africa said if that was the case, they wanted to do the same time for their countries.
The manual is a living document, he said. Other concepts may be introduced such as intangibles or cost sharing.
Pahlman wondered that if every country was to be allowed to insert their approach, what the point of the manual was.
Not one rule
An alternative to the arms-length principle is formulary apportionment, where profits are allocated between jurisdictions based on a calculation that considers the sales, assets and payroll in each one.
Spencer pointed out that the US uses formulary apportionment rather than the arms-length principle to share out state and local taxes. And he said the EU was probably going to use the same method if member states decide to implement a common consolidated corporate tax base.
Spencer, who said the TJN was in favour of country-by-country reporting where companies would have to report its profits, sales and taxes paid for each jurisdiction in which it operates, said the organisation is working on a study of whether formulary apportionment could work for multinational financial institutions.
One rule wont fit all, he said. For example, Brazil doesnt accept formulary apportionment. It sticks to its fixed margin, safe harbour approach. We are moving to a world of power being decentralised. Countries are looking for alternative solutions.
The other member of the panel, Cheng Chi, head of transfer pricing in China for KPMG, made a plea on behalf of taxpayers.
Before we get to that [a common, global approach to transfer pricing], taxpayers need to have flexibility about which method to choose and tax authorities should respect that, he said.
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