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Via a global analysis of more than 180 transfer pricing cases from 20 representative jurisdictions, Resolving Transfer Pricing Disputes explains how the law on transfer pricing operates in practice and examines how disputes between taxpayers and tax administrations are dealt with around the world. It has been designed to be an essential complement to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which focus on transfer pricing issues but do not refer to specific transfer pricing disputes. All of the transfer pricing cases discussed in the book are linked to the relevant paragraphs of the OECD Guidelines by means of a 'Golden Bridge', namely a table listing the cases according to the paragraphs of the Guidelines to which they refer. It therefore provides examples of the application of the Arm's Length Principle in many settings on all continents.
The experience of the United Kingdom in transfer pricing disputes is striking. On the one hand, due to the age of its income tax system, the United Kingdom has some of the earliest legislation that can be seen to have been addressed against transfer pricing. On the other hand, despite now having very modern legislation on transfer pricing, there are very few recorded transfer pricing disputes. Until the introduction of the modern rules in 1999, this appears to have been due to the strong administrative role played by the Inland Revenue as the tax authority at the time.
To some extent, a similar attitude, accepting administrative contacts as the appropriate means to resolve transfer pricing disputes, appears to have persisted since then. However, there are signs that taxpayers are now more willing to litigate transfer pricing disputes, although it seems that cases are still mostly resolved before any judicial hearing.
The development of transfer pricing rules and dispute resolution processes around the world reflects the fact that countries' tax systems develop at different times and at different rates, and that they share experiences with each other through organisations such as the OECD, the IMF, the World Bank, the United Nations and the European Union. Problematic transfer prices are a response by taxpayers to differences between tax systems that affect the allocation of taxing rights between countries. So it comes as no surprise to find countries developing similar approaches and following similar paths to transfer pricing. This observation does, however, risk obscuring some important divergences.
Divergences in the nature of transfer pricing standards
The first is in the nature of the standards that are used to deal with transfer pricing. The choice of standards is commonly seen as being between the traditional strict arm's length standard (ALS) and formulary apportionment. This reflects the two methods that have attracted attention in the United States. Avi-Yonah suggests in Chapter 3 that these approaches are merely ends of a spectrum. The material gathered by the country contributors suggests that the position is in fact more complicated.
Pharmaceutical companies need to have a continuing supply of good research developments to maintain their future profits. Their ability to profit from this research depends on exploiting patents based on the results of the research, but patents expire after a number of years, allowing other companies to compete with the developer, and some drugs are simply superseded by later developments.
In the 1960s, one major US pharmaceutical company had developed a number of valuable patents. The company naturally wanted to limit the amount of tax it would have to pay to exploit these patents. So in 1965 it established a subsidiary in Puerto Rico (a United States' dependency). At the time, US tax law permitted the transfer of patents to a Puerto Rican subsidiary tax free, and Puerto Rico offered tax haven treatment on the returns from exploiting the patents. The US parent therefore transferred the patents to the subsidiary without receiving any payment or royalties in return. The subsidiary relied on the patents in manufacturing the drugs they covered, and sold the products to the US parent.
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