Unanimously, the business community agrees that the transfer pricing requirements represent a heavy and complex burden. There can be no doubt that those within the business community are spending a great deal of time and resources to achieve a useful purpose that may be impossible to attain. Transfer pricing is a century-old theory, which never achieves its own goal: multinational taxation.
In fact, the opposite occurs; it often provides a means for income shifting in low-tax countries. This may be the result of the fact that, decades ago, globalisation and dematerialisation were non-existent. However, there are other reasons such as the process of considering affiliate companies as fully independent.
The compulsory requirement to operate at arm’s length in the framework of intra-firm transactions is a fiction which may never become reality. For these reasons and many more, alternatives are under serious discussion within the halls of academia (J Weiner, R Avi-Yonah, K Clausing, etc) and venerable international political institutions.
Let’s focus on the proposition with the best chance to be implemented, sooner rather than later, with any luck: the formulary apportionment. Coming from the US and Canada, going to Europe, the apportionment formula is not yet the ideal immigrant that European tax players are ready to welcome. However, the formula has everything to become one of the best tools to avoid income shifting when transfer pricing just increases it.
The formula is as easy as a consolidated tax base apportioned between states according to factors. In some countries, like France, accounting consolidation is already compulsory and factors are not a real issue since they are data easily available to reflect the group’s activity in a country: assets, employees, and sales. Throw out the consulting fees with seven digits! Throw out the sophisticated pricing models! Throw out the arm’s-length principle!
There is no good reason for European Member States, except for the usual suspects, to refuse the adoption of the Common Consolidated Corporate Tax Base. On the other side of the Atlantic, a great many people are producing a large volume of discussion papers promoting a unilateral move, as tax credit in 1918 or transfer pricing in 1968, to a worldwide formulary profit split.
However, these authors still admit that the best place to discuss the topic would be an international organisation, which would allow avoiding double or zero taxation and the convergence through a unique formula.
Meanwhile, the OECD continues to draft new transfer pricing rules (eg, restructuring), and update principles on comparability that the talented Transfer Pricing Forum will certainly do its best to interpret as soon as they finish with the previous version.
Sabrina Laubisse, Transfer Pricer, Société Générale Bank and PhD candidate
