Sir, – Multinational corporations by definition pay taxes in jurisdictions which have different tax rates, and consequently have a financial incentive when allocating profit to the different companies of the corporate group to allocate as much profit as possible to low-tax jurisdictions, and as little profit as possible to high-tax jurisdictions. To avoid this artificial pricing, sometimes referred to as transfer pricing, the internationally agreed standard for setting such commercial conditions between companies of the same group is the “arm’s-length principle”, as set out in article nine of the OECD model tax convention. The OECD transfer pricing guidelines provide five methods to approximate an arm’s-length pricing of transactions and profit allocation between companies of the same corporate group. Multinational corporations retain the freedom to apply methods not described in those guidelines to establish transfer prices, provided those satisfy the arm’s-length principal. In allowing this option, the OECD recognises that the arm’s-length principal is not an exact science and its application is based on a comparison of the conditions in an intra-group transaction with the conditions in transactions between independent companies. For such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. This is also recognised by the OECD guidelines, which list a further five attributes or “comparability factors” that may be important when determining comparability. Consequently, the OECD guidelines are simply a reference document recommending methods for approximating an arm’s-length pricing outcome.
To avoid uncertainty, some corporations seek clarification in advance from revenue authorities around the world, as to the validity of their proposed pricing arrangements, known as advance-pricing arrangements (APAs). The OECD guidelines state that APAs are intended to supplement the traditional administrative, judicial, and treaty mechanisms for resolving transfer-pricing issues.
Now, let us superimpose the EU state aid provisions to the above principles. The qualification of a measure as state aid requires the following four cumulative conditions to be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between member states.
This leads us to the €13 billion question. Do we appeal the decision? The simple answer to that “complex” question is yes! Otherwise, we run the possible risk of allowing the European Commission to introduce a common consolidated corporate tax-base hybrid system, retrospectively. Thereby, doing the European Commission‘s work in selectively upending, to echo Tim Cook, the international tax system, through the prism of state aid. – Yours, etc,
JOHN R QUIGLEY,
Lecturer in Taxation,
Limerick Institute
of Technology, Limerick.