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 H. Transfer Pricing Documentation
I. Attributing Profits to Permanent Establishments
J. Dispute Resolution
4. Practical and Theoretical Problems Encountered in Applying the
Arm’s Length Principle
A. Conceptual Problems Encountered in Applying Transfer Pricing
Rules Based on the Arm’s Length Principle
1. Corporate Synergies
2. Allocating and Rewarding Risk in an MNE Group
3. Rewarding Contributions to Intangible Value
4. Capital
B. Important Practical Difficulties Encountered in Applying ALP-
Based Transfer Pricing Rules
1. Access to Taxpayer Information
2. Availability of Information on Comparable Transactions and
Comparable Business Operations
3. The Complexity of Applying the Arm’s length Principle
4. Discretion, Corruption, and Publicity
C. Purpose and Scope of ALP-Based Transfer Pricing Rules
1. Treaty Interpretation Issues: The Purpose and Scope of ALP-
Based Transfer Pricing Rules
2. Issues Related to the Scope of Article 9
5. Capital
A. Introduction
B. The Nature of the Capital Issues under Consideration
1. Gifted Capital
2. Level and Mix of Capital
3. The Return to Capital
C. Transfer Pricing Treatment of Capital Issues Prior to BEPS
D. Relevance of the ALP to Capital Transfers
1. The Transfer of Capital—‘Gifted’ Capital
2. Level and Mix of Capital
3. The Return to Capital
E. Treatment of Capital under Article 7
1. Gifted Capital—Cash Transfers in Respect of the Issue of
Shares
2. Gifted Capital—Asset Transfer in Respect of the Issue of
Shares
3. The Level of Capital

8
 4. The Mix of Capital
5. Returns to Capital
6. Summary
F. Capital Issues in the Run-up to BEPS
6. BEPS Modifications to Transfer Pricing Rules
A. The BEPS Action Plan
B. The Real Deal—Delineating and Disregarding Transactions
C. Risk
D. Excessive Capital/Returns to Capital
E. Intangibles
1. Definitions
2. Corporate Synergies
3. Ownership and Entitlement to Profits Attributable to
Intangibles
4. Valuation of Intangibles
5. Hard-to-Value Intangibles
6. Cost Contribution Arrangements
F. Profit Splits, Global Value Chains, and Financial Transactions
G. Transparency, Documentation, and Country-by-Country
Reporting
H. Other BEPS Work with Transfer Pricing Consequences
1. PE Issues
2. Interest Deductions—The Fixed Ratio Approach
I. Transfer Pricing Problems Not Addressed in the BEPS Reports
7. Evaluation of BEPS Transfer Pricing Measures
A. Alignment of Income and Value Creation
1. Risk and Control of Risk
2. Undercapitalization, Overcapitalization, and the Rewards to
Funding Entities
3. Recognition, Delineation, and Disregard of Taxpayer
Transactions
4. Ownership of Intangibles, Cost Contribution Agreements,
and the Required Reward for Important Intangible-Related
Functions
B. Complexity: The Cost of the Cure
C. Addressing the Lack of Reliable Comparables
D. Permanent Establishments, Interest Expense, and Transfer
Pricing
1. PE Rules—Lowering of the Threshold

9
 2. Interest Deductions—The Fixed Ratio Approach
E. Administrative Matters
1. Reporting and Transparency
2. Resolving Transfer Pricing Disputes
F. Unaddressed Issues
8. Prospects for the ALP after BEPS
A. Assessment of the ALP after BEPS
1. Recap of the Key Conclusions of Chapters 1–7
2. General Summary of the Successes and Shortcomings of
BEPS Transfer Pricing Work
3. The Viability of the ALP after BEPS
4. Continuing Problems for a Transfer Pricing System Based on
the ALP
B. General Options for the Future
C. Potential Simplifying Enhancements of the Existing ALP
Framework
1. Introduction
2. Modification Options
D. More Fundamental Changes to the Operation of the ALP
1. Introduction
2. Approach to Avoidance under the ALP
3. Capital
4. Risk
5. Funding
6. IP
E. Non-ALP Alternatives
1. Nature of Non-ALP-Centric Reforms
2. Possible Changes to Non-Transfer Pricing Rules
3. Replacement of the ALP
4. Fundamental Systemic Change
5. Conclusion
F. The Future

Index

10
 TABLE OF LEGISLATION

CONVENTIONS AND TREATIES

Arbitration Convention 1995, EU 2.99
Convention on Mutual Administrative Assistance in Tax Matters 1988, OECD,
Council of Europe 4.42
Draft Model Convention on the Allocation of Profits 1933, League of
Nations 1.62, 1.85, 1.93–1.109, 1.114, 2.18, 2.100, 4.88, 5.36
Art. 3 2.18, 4.100
Art. 5 1.106, 2.14, 4.87, 5.44
Draft Model Convention on the Allocation of Profits 1935, League of Nations
Art. 6 1.103, 5.44
Draft Model Tax Treaty 1963, OECD 2.02, 2.13–2.20, 2.30, 2.31, 2.37, 2.131
Art. 7 2.14, 2.18, 2.34
Art. 7(1) 2.19
Art. 7(2) 2.17
Art. 7(3) 2.18
Art. 7(4) 2.18
Art. 7(5) 2.18
Art. 7(6) 2.18
Art. 7(7) 2.18
Art. 9 1.115, 2.13–2.15, 2.17, 2.81, 2.131
Art. 9(1) 2.15
General Agreement on Tariffs and Trade (GATT) 1994 8.107
London Model Tax Treaty 1.110–1.116, 2.14, 2.18, 2.107
Art. VII 2.14
Mexico Model Tax Treaty 1.110–1.116, 2.14, 2.18, 2.46, 2.107
Art. VII 2.14
Model Double Tax Convention 1977, OECD 2.02, 2.30–2.34, 2.46, 2.56
Art. 1 8.54
Art. 7 2.52, 2.100, 2.107, 3.61, 3.65–3.67, 3.71
Art. 7(3) 2.107
Art. 7(4) 2.107
Art. 7(5) 2.107
Art. 7(6) 2.107
Art. 7(7) 2.107
Art. 9 2.56, 2.91
Art. 9(1) 2.30, 2.56, 3.01
Art. 9(2) 2.30, 2.31, 2.33, 2.51

11
Model Double Taxation Treaty between Developed and Developing Countries
1979, UN 2.45–2.49
Art. 5 2.48
Art. 7 2.48
Art. 9 I.06, 1.105, 2.48, 2.119, 5.44
Art. 9(1) 2.47, 3.01, 3.06, 3.07
Art. 9(2) 2.47
Model Tax Treaty on Income and on Capital 2014, OECD 1.49, 2.02, 2.46–2.48,
3.01, 4.79, 4.88, 4.91, 4.92, 4.105–4.107, 5.34, 5.45, 5.48, 6.07
Preamble 8.54
Intro para. 2 4.83
Intro para. 3 1.12, 4.83
Intro para. 29 4.90
Intro paras. 33–35 4.105
Art. 1 4.100, 4.101, 4.103
Art. 3 4.85, 4.88, 4.105, 5.32
Art. 3(1)(c) 4.88
Art. 3(2) 4.85, 4.88
Art. 5 1.103, 2.111, 6.88, 8.36, 8.37
Art. 5(4) 6.89
Art. 5(5) 1.102, 2.112, 6.89, 6.90, 6.92, 8.36, 8.37
Art. 5(6) 6.89, 6.90, 6.92
Art. 5(7) 1.101
Art. 6(1) 2.01
Art. 7 I.15, 2.33, 2.44, 2.100, 2.101, 2.103, 2.107, 2.108, 2.110, 3.71, 4.78,
4.88, 4.90, 4.100, 4.107, 5.36, 5.93–5.101, 6.39, 6.92, 7.39, 7.40, 7.42,
8.36, 8.37, 8.63, 8.69
Art. 7(1) 2.107
Art. 7(2) 1.85, 2.104, 2.107
Art. 7(3) 2.107, 5.98
Art. 7(4) 2.107
Art. 8 4.88, 5.36
Art. 9 I.15, 1.105, 2.42, 2.44, 2.106, 2.110, 3.64, 4.05, 4.61, 4.77–4.79, 4.81–
4.84, 4.86–4.90, 4.95–4.98, 4.100–4.103, 4.107, 5.26, 5.32, 5.34–5.36,
5.44–5.46, 5.48, 5.87, 5.93, 5.96, 6.39, 7.05, 7.07, 7.21, 7.96, 7.99, 8.21,
8.53, 8.55
Art. 9(1) I.06, 3.06, 3.07, 4.78–4.80, 4.83, 4.84, 4.87, 4.88, 4.100, 5.34, 5.36
Art. 9(1a) 4.84
Art. 9(1b) 4.84
Art. 9(2) 2.107, 4.79, 4.86, 4.87, 4.89, 4.102, 5.26, 5.52, 5.98, 8.54
Art. 9(3) 7.99
Art. 11 4.100
Art. 11(6) 4.100, 5.44
Art. 12 4.100
Art. 12(4) 4.100, 5.44

12
 Art. 19 4.82
Art. 23A 1.12
Art. 23B 1.12
Art. 25 2.51, 4.79
Art. 26 2.94
Model Treaty 1992, OECD 2.02
Art. 9 2.35
Model Treaty 2010, OECD 2.107
Art. 7 3.67
Multilateral Convention on Mutual Assistance in Tax Matters 2011, OECD 4.42
Treaty between Austria and Czechoslovakia 1.40
Treaty between Austria/Hungary and Prussia 1899 1.45
Treaty between Danzig and Poland 1924 1.40
UN Resolution 2(III) of the Economic and Social Council 1 Oct. 1946 2.01
US–France Tax Treaty 1930
Art. IV 1.106
Vienna Convention on the Law of Treaties 4.91
Pt III Section 3 4.91
Art. 1 4.91
Art. 2 4.91
Art. 31 4.91
Art. 31(1) 4.91
Art. 31(2) 4.91
Art. 31(3) 4.91
Art. 31(4) 4.91
Arts. 31–33 4.91, 4.105
Art. 32 4.91

OECD PUBLICATIONS
Action Plan on Base Erosion and Profit Shifting (Action Plan), 2013 4.44, 5.25,
5.27, 6.02–6.08, 6.10, 6.12, 6.14, 6.20, 6.23, 6.34, 6.37, 6.40, 6.53, 6.55, 6.63,
6.71, 6.74, 6.78, 6.80, 6.89, 6.94, 6.101, 7.07, 7.22, 7.37, 7.47, 7.70, 7.85,
7.106, 7.109, 8.02, 8.03, 8.23, 8.38, 8.54, 8.58, 8.71
Addressing Base Erosion and Profit Shifting, 2013 5.02, 5.15, 5.25, 6.95, 8.03,
8.04, 8.71
Aligning Transfer Pricing Outcomes with Value Creation (Actions 8–10 Final
Report), 2015 3.28, 4.57, 5.05, 6.11–6.14, 6.17, 6.18, 6.20, 6.24–6.32, 6.34,
6.35, 6.43–6.45, 6.47, 6.48, 6.51, 6.57–6.60, 6.62–6.64, 6.66–6.73, 6.75–6.77,
6.82, 6.87, 6.89, 6.92, 7.07, 7.12, 7.13, 7.15–7.17, 7.19–7.22, 7.24, 7.25, 7.27,
7.28, 7.32–7.36, 7.39, 7.43, 7.44, 7.48, 7.50, 7.52, 7.54–7.57, 7.60–7.66, 7.71,
7.81–7.83, 7.85, 7.86, 7.88–7.90, 7.109, 8.07, 8.14, 8.34, 8.52, 8.72, 8.73
Allocation of Central Management and Service Costs, Report 1984 2.50, 2.53,
2.96

13
Approaches to Address BEPS Involving Interest in the Banking and Insurance
Sectors, 2016 5.66
Countering Harmful Tax Practices More Effectively, Taking into Account
Transparency and Substance (Action 5), 2015 7.96
Dealing Effectively with the Challenges of Transfer Pricing, 2012 4.43
Discussion Draft on Profit Split Methods, (drafts of 2016 and 2017) 6.30, 6.78,
7.17, 7.87, 7.91, 8.07, 8.38, 8.42
Discussion Draft on Revisions to Ch 1 of the Transfer Pricing Guidelines
(Including Risk, Recharacterisation, and Special Measures) (Actions 8, 9 and
10), 2014 8.58
Discussion Draft on the Attribution of Profits to Permanent Establishment,
2001 3.67
Double Tax Conventions and the Use of Base Companies, Report 1987 5.20
Explanatory Statement, 2015 7.03
Fiscal Incentives for Private Investment in Developing Countries, Report
1965 2.45
Guidelines on Business Restructuring 4.99
Harmful Tax Competition: An Emerging Global Issue, Report 1998 5.21, 8.04
Intercompany Transfer Pricing Regulations under US s. 482 Temporary and
Proposed Regulations, Report 1993 2.81, 5.60
Interpretation and Application of Art 5 (Permanent Establishment), 2012 6.88
Limiting Base Erosion Involving Interest Deductions and other Financial Payments
(Action 4 Final Report), 2015 5.15, 6.95–6.99, 7.95, 7.96, 8.07, 8.71
Manual on Effective Mutual Agreement Procedures (MEMAP) 2006 2.99
Model Tax Convention: Attribution of Income to Permanent Establishments,
Report 1994 2.100
Preventing the Avoidance of Permanent Establishment Status (Action 7 Final
Report), 2015 6.89, 6.90, 6.92, 7.92, 8.37
Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (Action
6 Final Report), 2015 8.54
Public Discussion Draft, BEPS Action 7, Additional Guidance on the Attribution
of Profits to Permanent Establishments (drafts of 2016 and 2017) 6.92, 6.93,
7.94, 8.36
Report on the Attribution of Profits to Permanent Establishments (2008 PE
Report) 2.101, 2.102, 2.116, 3.65, 5.86, 7.92
Report on the Attribution of Profits to Permanent Establishments (2010 PE
Report) 2.101–2.107, 2.112, 2.116, 3.62, 3.67–3.71, 4.90, 4.100, 5.69, 5.85–
5.91, 5.94–5.100, 6.39, 7.33, 7.92, 8.40
Tax Obstacles to International Flows of Capital and Services, 1987 5.20
Tax Policy Reforms in the OECD, 2016 8.102
Taxation of Global Trading of Financial Instruments (1998 Global Trading
Report) 2.114, 2.115, 4.90, 5.81–5.85
Taxation of Global Trading of Financial Instruments: A Discussion Draft,
1997 5.25, 5.82
Taxation of Multinational Banking Enterprises, Report 1984 2.52, 2.100, 5.81

14
Thin Capitalization, Report 1987 2.54–2.58, 2.83, 4.102, 5.03, 5.24, 7.97
Transfer Pricing and Multinational Enterprises, Report 1979 2.35–2.44, 2.52–
2.54, 2.83, 2.86, 2.87, 2.91, 2.93, 2.125, 2.128, 3.34, 4.98, 4.102, 8.81, 8.85
Transfer Pricing and Multinational Enterprises, Three Taxation Issues, Report
1984 2.50–2.54, 2.81, 2.83, 2.86, 2.94, 5.81, 8.54
Transfer Pricing, Corresponding Adjustments and the Mutual Agreement
Procedure, Report 1984 2.31, 2.50, 2.51, 2.94, 8.54
Transfer Pricing Documentation and Country-by-Country Reporting (Action 13
Final Report), 2015 6.81–6.87, 7.100, 7.101, 8.05
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations,
1995 2.42, 2.82–2.97, 2.100, 2.101, 2.103, 2.118, 2.119, 2.126, 3.36, 3.61,
4.88, 4.99, 5.67, 6.09, 6.12, 7.62, 8.45, 8.85
Preface, para. 1 2.84
para. 2 2.84
para. 4 2.84
para. 6 2.84
para. 7 2.84
Ch I 2.85
Ch II 2.86
Ch III 2.44, 2.86
Ch VI 2.96
Ch VII 2.96
Ch VIII 2.96
Ch IX 2.96
paras. 1.42–1.44 2.125
para. 1.5 2.90
para. 1.7 2.85
para. 1.8 2.85
para. 1.12 2.85
paras. 1.17–1.35 2.86
para. 1.36 2.91
paras. 1.36–1.41 2.42
para. 1.37 2.91
paras. 1.38–1.39 2.93
para. 1.42 2.86
paras. 1.45–1.48 2.85
para. 1.68 2.89
para. 1.70 2.89
para. 3.2 2.87
para. 3.5 2.87, 2.88
para. 3.49 2.89
paras. 3.49–3.57 2.87
para. 3.53 2.89
paras. 3.55–3.56 2.89
paras. 3.58–3.74 2.44, 2.87, 8.81, 8.85

15
 para. 4.78 2.94
paras. 5.16–5.27 2.96
para. 14 2.83
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations,
2010 I.09, I.16, 2.05, 2.81, 2.83, 2.118, 2.119, 2.121–2.130, 3.01, 3.02, 3.04,
3.06, 3.08, 3.10–3.13, 3.16–3.22, 3.25, 3.26, 3.29, 3.30, 3.33–3.37, 3.40, 3.41,
3.45, 3.50, 3.51, 3.57, 3.64, 4.05, 4.10–4.12, 4.16, 4.21, 4.28, 4.58, 4.59, 4.61,
4.83, 4.90–4.104, 4.106, 4.107, 5.16, 5.18, 5.21, 5.32, 5.34, 5.36, 5.41, 5.44,
5.45, 5.48, 5.49, 5.51, 5.53, 5.54, 5.56, 5.57, 5.61, 5.64, 5.65, 5.68, 5.70, 5.72,
5.75, 5.78, 5.87, 5.91, 5.100, 6.07–6.09, 6.11, 6.12, 6.14, 6.15, 6.18, 6.21, 6.24,
6.56, 6.58, 6.66–6.68, 6.78, 7.08, 7.46, 7.58, 7.61, 7.69, 7.79, 7.84, 7.86, 7.92,
7.100, 7.109, 8.02, 8.24, 8.34, 8.38, 8.42, 8.45, 8.46, 8.53, 8.54, 8.90
Preface, para. 7 4.78, 4.83, 4.93
para. 10 4.83, 4.93
Ch I 4.101, 6.75, 7.09
Section D.1 5.57
Chs I–III 6.22, 6.56
Ch IV 8.34
Section E 8.33
Ch VI 6.53, 6.56, 6.65, 6.75, 6.77, 7.50, 7.53, 8.45
Annex 6.77, 7.55
Appendix 6.49, 6.50
Ch VII 3.49, 7.112
Ch VIII 6.75, 7.65
Annex 6.75, 6.77
Ch IX 3.29, 5.58, 5.91, 6.22, 6.24
para. 1.2 5.57, 5.65, 8.53, 8.54
para. 1.6 5.57
para. 1.11 3.16, 5.57, 7.84
paras. 1.23–1.27 2.123
para. 1.33 3.11, 3.22
para. 1.36 3.25
para. 1.42 3.26
para. 1.45 3.29, 4.16, 7.10
paras. 1.45–1.46 4.16
paras. 1.45–1.50 3.29
para. 1.49 5.91
para. 1.52 3.16
para. 1.53 3.17, 4.88, 6.09, 6.13, 7.46
para. 1.64 3.16, 3.41, 5.42, 5.51, 6.12
paras. 1.64–1.65 6.09
paras. 1.64–1.69 4.99, 4.101, 4.102, 5.42, 5.44, 5.46, 5.49
para. 1.65 3.18, 5.51, 5.63, 5.72, 5.74, 6.11, 6.12
para. 1.66 4.102, 5.57, 5.65, 8.54
para. 1.67 5.57

16
para. 1.74 5.57
paras. 2.1–2.11 2.130
para. 2.2 3.33
para. 2.3 3.36
para. 2.4 5.67
para. 2.9 3.37
para. 2.11 3.40
paras. 2.13–2.20 3.34
paras. 2.21–2.38 3.34
para. 2.57 3.35
para. 2.58 3.35
paras. 2.58–2.107 3.35
paras. 2.39–2.55 3.34
para. 2.108 3.35
paras. 2.108–2.149 3.35
para. 2.109 4.59
paras. 2.121–2.123 8.90
paras. 2.127–2.130 2.81
para. 3.4 3.12
paras. 3.31–3.34 4.57
paras. 3.55–3.59 4.69
paras. 3.69–3.71 3.02
para. 3.74 2.81
para. 4.117 5.21
paras. 5.4–5.6 3.57
para. 5.11 3.57
para. 5.15 3.57
para. 6.26 4.59
paras. 6.28–6.35 4.61
para. 7.6 3.50
para. 7.9 5.34
paras. 7.9–7.11 3.51
para. 7.13 3.51, 4.11
para. 8.30 8.54
paras. 9.1–9.2 2.122
para. 9.6 2.128, 5.57
para. 9.10 3.29, 5.62
paras. 9.10–9.47 2.123
para. 9.11 3.29
para. 9.12 3.29, 3.30
paras. 9.13–9.16 3.29
paras. 9.17–9.38 3.30
para. 9.19 2.128, 7.84
para. 9.20 5.69
paras. 9.20–9.21 2.123

17
 paras. 9.29–9.32 5.69
para. 9.52 2.128
paras. 9.56–9.57 2.89
para. 9.57 2.127
para. 9.59 2.124
paras. 9.69–9.73 2.128
para. 9.83 2.127
para. 9.84 2.128
para. 9.94 2.125
para. 9.105 2.124
para. 9.134 2.128
paras. 9.134–9.138 2.125
para. 9.138 2.128
para. 9.141 2.124
paras. 9.154–9.160 4.10
para. 9.161 2.126
para. 9.162 4.102
para. 9.163 5.56
para. 9.164 2.124
paras. 9.165–9.166 2.126
para. 9.168 5.56
para. 9.171 2.126, 5.56
para. 9.172 2.128
para. 9.173 2.128, 5.57
para. 9.174 2.124, 2.128
para. 9.175 5.58
para. 9.176 5.58
para. 9.177 5.59
para. 9.179 2.128, 5.64
para. 9.180 2.126
para. 9.181 5.65
paras. 9.181–9.182 2.127
paras. 9.183–9.187 2.126
para. 9.187 5.57
para. 9.189 2.124
paras. 9.190–9.194 5.54
para. 9.194 2.124
para. 11 4.84

UN PUBLICATIONS
Practical Manual on Transfer Pricing for Developing Countries 2013 I.16, 2.117–
2.120, 3.01, 3.02, 3.16, 3.29, 3.40, 3.41, 3.50, 3.57, 3.58
Ch 5 3.12

18
 Ch 7 3.57
Ch 10 8.04
Ch 10.3 3.02
para. 1.4.4 3.11
para. 5.1.3 3.16
para. 5.1.5 3.22
para. 5.3.1.4 3.12, 3.16, 3.18
para. 5.3.2 3.25
para. 5.3.2.2 3.26
para. 5.3.2.17–5.3.2.29 3.29
para. 5.3.2.18 3.29
para. 5.3.2.22 3.29
paras. 5.3.2.22–5.3.2.28 3.30
para. 5.3.2.23 3.29
para. 5.3.2.25 3.30
para. 5.3.2.34 3.24
para. 6.1.2.1 3.33
para. 6.1.3.2 3.36
paras. 6.2.2.1–6.2.5.4 3.34
paras. 6.2.6.1–6.2.12.7 3.34
paras. 6.2.13.1–6.2.21.4 3.34
para. 6.3.1.2 3.35
paras. 6.3.2.1–6.3.2.7 3.35
para. 6.3.2.2 3.35
paras. 6.3.13.1–6.3.18 3.35
paras. 6.3.13.2 3.35
para. 10.2.1.1 3.01
Practical Manual on Transfer Pricing for Developing Countries 2017 2.117–
2.120, 3.01, 3.50
para. 9.4.2.3 2.118
para. 10.3.5.2 2.118
para. 10.4.7 2.118

AUSTRALIA
ITAA 1997, Sub-div 815–B, s 815-130 5.49
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit
Shifting) Act 2013 5.49

BELGIUM
Law of 22 June 2005 5.23

CANADA

19
Income Tax Act
section 247(2)(b) 5.49
section 247(2)(d) 5.49

FRANCE
Finance Law 2013, Art 23, II 5.22
Tax Code, Art 212 bis 5.22

GERMANY
Corportate Income Tax Act, s 8(3) 5.46
Corporate Income Tax Code, s 8a 5.22
Foreign Tax Act 2007
section 1(1) 5.46
section 1(3) 2.81, 4.61
Income Tax Code, s 4h 5.22

INDIA
Income Tax Act 1961, Ch X 5.36

NETHERLANDS
Corporate Income Tax Act, s 8b 5.46

NEW ZEALAND
Income Tax Act 2007
section GB2 5.46
section GC6 5.46
section GC14 5.46

UNITED KINGDOM
ICTA 1980, s 770 4.79
TCGA 1992
sections 29–31 5.36
section 140 5.11
TIOPA 2010
Pt 4 4.101, 5.46
section 146 5.46

20
 sections 146–217 5.36
section 147 4.101, 5.46
section 164 4.101, 5.46

UNITED STATES
Internal Revenue Code
section 351 5.11
section 482 1.106, 2.07, 2.22, 2.28, 2.72, 2.74, 2.80, 2.85, 2.123, 4.61
section 936(h) 2.66, 5.24, 7.30
Revenue Act 1921, s 240(d) 8.21
Revenue Act 1928, s 45 8.21
Treasury Regulations on s 451935 2.85
reg 86 2.22, 2.85
Regulations 1994 2.69–2.82, 2.89, 2.97, 2.130
1.482–1(b)(1) 2.80
1.482–1(i)(9) 2.80
Regulations No 41 Relative to the War Excesses Profits Tax
Art. 77 1.106
Art. 78 1.106
Regulations on s 482 Internal Revenue Code 1968 2.05, 2.21–2.29, 2.36, 2.41,
2.60, 2.73, 2.80, 3.34
section 1.482–1(b)(1) 2.23
section 1.482–1(d)(1) 2.21
section 1.482–1(d)(2) 2.30
section 1.482–2(b)(2) 2.41
section 1.482–2(d)(2)(iii)(a)–(m) 2.23
section 1.482–4(f)(2) 4.61
Revenue Act 1921, s 240(d) 1.106
Revenue Act 1926, s 240(f) 1.106
Revenue Act 1928, s 45 1.106, 1.107
Revenue Act 1932, s 45 1.80
Revenue Act 1934 2.22
Tax Reform Act 1986 2.71, 2.72
War Revenue Act 1917 1.106

21
 INTRODUCTION

A. The ALP
B. Evaluating the ALP
C. The Structure of the Book

I.01 For many years, transfer pricing has been the exclusive domain of tax
specialists: lawyers, economists, and accountants. Recently, transfer
pricing has emerged onto a broader stage as evidenced by many articles in
the popular press, challenges raised by NGOs and others concerned with
economic development, and the status of transfer pricing as one of the
primary areas of focus in the G20/OECD project to address corporate tax
base erosion and profit shifting (hereafter BEPS).
I.02 Critics have asserted that traditional transfer pricing approaches
permit multinational corporations to easily shift their income away from
the taxing jurisdictions where that income is earned and into tax-
advantaged locations. The OECD has hurriedly written hundreds of pages
of new guidance in its BEPS Project in an attempt to shore up the
traditional approach and constrain transfer pricing abuses. The European
Union has challenged favourable transfer pricing rulings granted to some
companies under its trade regulations related to state aid. At the urging of
the G20 and OECD, many countries are in the process of dramatically
expanding tax reporting rules to require companies to report
comprehensively the geographic allocation of their income on a country-
by-country basis in the hope that greater transparency will aid more
effective tax enforcement.
I.03 One question necessarily underlies all of the recent furore over
transfer pricing. That question is whether the so-called arm’s length
principle (hereafter, the ALP), which forms the core of traditional transfer
pricing policy and thought, is fit for purpose. Critics have asserted that it is
not. Governments and taxpayers thus far have asserted that there are
serious difficulties in abandoning the ALP in favour of some other
approach. Some have questioned, however, whether the governments’
continuing adherence to transfer pricing rules based on the ALP, reiterated
most recently in the OECD work on BEPS and the work of the United
Nations on its Practical Manual, is grounded on a sufficiently careful and

22
thorough analysis.
I.04 This book seeks to address this question of whether the ALP is fit for
purpose by evaluating the strengths, weaknesses, and continuing viability
of the ALP after BEPS.

A. The ALP
I.05 Transfer pricing rules regulate for tax purposes the prices and other
terms on which members of a global corporate group of companies
(hereafter, a multinational enterprise, or MNE group) sell products,
services, and group assets to one another. Those prices determine the
allocation of the income of an MNE group among the countries in which it
does business. Under the existing laws and tax treaties of most countries,
the prevailing transfer pricing rules are based on the ALP. Simply stated,
the ALP requires the terms and conditions of transactions and other
commercial relations between related entities to be consistent with those
that would be agreed among similarly situated unrelated or independent
entities.
I.06 The definitive statement of the ALP is found in Article 9(1) of the
OECD Model Tax Convention on Income and on Capital, and in the
virtually identical Article 9 of the United Nations Model Double Taxation
Convention Between Developed and Developing Countries. The relevant
treaty language states:
Where (a) an enterprise of a Contracting State participates directly or
indirectly in the management, control or capital of an enterprise of the other
Contracting State, or (b) the same persons participate directly or indirectly in
the management, control or capital of an enterprise of a Contracting State and
an enterprise of the other Contracting State, and in either case conditions are
made or imposed between the two enterprises in their commercial or financial
relations which differ from those which would be made between independent
enterprises, then any profits which would, but for those conditions, have
accrued to one of the enterprises, but, by reason of those conditions, have not
so accrued, may be included in the profits of that enterprise and taxed
accordingly.

I.07 Under the ALP, then, a corporation that is a member of an MNE

group is required to report the same profits from the conduct of its
financial and commercial relations with other group members that it would
report from conducting similar financial and commercial relations with an
unrelated entity. The ALP is also applied to attribute income between a

23
branch (or ‘permanent establishment’) of a corporation in one country and
the head office of the corporation in another country. However, in a branch
situation the generally accepted approach to applying the ALP varies in
important ways from the approach used in considering the commercial
relations between two related corporations. The primary focus in this book
is on the operation of the ALP as it relates to transactions or arrangements
between separate corporations in the same MNE group.
I.08 The ALP was enshrined as the international transfer pricing standard
in the first half of the twentieth century and has remained the foundational
transfer pricing principle for nearly 100 years. That is not to say, however,
that transfer pricing rules have been static over that period of time.
Commercial developments and expanding practical experience in applying
transfer pricing principles have resulted in a rather pronounced evolution
in our understanding of the implications of the ALP and the ways it can
and should be applied.

B. Evaluating the ALP

I.09 The task we have set for ourselves in this book is to evaluate carefully
the viability of the ALP. Essentially, the book poses the question: can the
ALP work in today’s commercial environment? In addressing that
question, we will necessarily consider whether the BEPS changes to the
OECD Transfer Pricing Guidelines adequately address the problems that
existed with the ALP as it was applied in the period immediately preceding
BEPS.
I.10 In asking whether the ALP can work, we need to be clear what
‘working’ means. In our view, there is no single test for assessing the ALP.
The following five considerations seem especially important, however:

– Ease of administration—is the ALP easy to understand and apply in

practice? That is, can transfer pricing rules based on the ALP be
readily administered in a transparent and even-handed manner by all
relevant taxpayers and tax administrations?
– Economic efficiency, including especially distortions to the scale or
location of investment—does the ALP influence the scale or form of
investment or the location where investment is made or where capital
is located? Is the ALP efficient in minimizing double taxation and
preventing less than single taxation?
– Robustness to abuse—can transfer pricing rules based on the ALP
effectively prevent potential abuses, including geographic

24
 manipulation of the tax base?
– Overall systemic stability—does the operation of the ALP promote
actions by taxpayers and/or countries which destabilize the system of
transfer pricing or the wider international tax system?
– Fairness—though questions of fairness are inevitably more subjective,
it is appropriate to ask whether the ALP fairly allocates taxing rights to
those countries in which the MNE group’s valuable assets are held and
those countries in which economic activities and value creation occur?

I.11 Supplementing our consideration of these questions must be an

examination of whether areas of critical transfer pricing concern in fact
arise because of flaws in the underlying international tax architecture. In
the BEPS work, for example, transfer pricing issues have been evaluated
primarily through a lens focused on high income, low function entities,
located in low-tax or tax haven jurisdictions. Is the prevalence of corporate
tax structures that shift income to such entities principally a transfer
pricing issue, or do such concerns have their roots in the fundamental
source/residence compromises of the 1920s? If so, can a transfer pricing
system based on the ALP, or indeed any transfer pricing regime, solve the
underlying problems?
I.12 We do not intend to address these questions by way of a detailed
comparison of arm’s-length-based transfer pricing rules with possible
alternative approaches, including formulary apportionment. A great deal of
squabbling has taken place in recent years about whether arm’s-length
transfer pricing should be replaced with an alternative approach. For us,
that question should only be considered after a careful evaluation of
whether the current system works or can be made to work. The transaction
costs of changing systems would be significant. Those costs should only
be incurred if one can first conclude both that an ALP-based system cannot
be made to work and that there is an alternative system that would be an
improvement. In this book, we address only the first question, whether an
ALP-based system can be made to work, recognizing that a consideration
of whether alternative systems can be made to work as well or better than
one based on the ALP is an undertaking at least as complex as the one we
have set for ourselves.

C. The Structure of the Book

I.13 To assess the system of ALP-based transfer pricing rules, we need to
clarify the nature of the ALP, examine its derivation and evolution, and

25
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