Tuesday, January 24, 2006

Two recent papers on transfer pricing

Transfer pricing is the area of tax law and economics that is concerned with ensuring that prices charged between associated enterprises for the transfer of goods, services and intangible property accord with the arm's length principle. In fact the multidisciplinary character of transfer pricing (law and economics or vice versa) makes it a very dynamic and interesting area where underlying principles are often questioned by changes in business and management developments. The papers below approach transfer pricing from a business management side and as any specialist in transfer pricing will say to you “understanding the business is essential to understand the business choices and therefore their pricing policies”.

Markus Brem paper, "Globalization, Multinationals and Tax Base Allocation: Advance Pricing Agreements as Shifts in InternationalTaxation?" (December 2005 Indian Institute of Management Ahmedabad),elaborates on the emergence of Advance Pricing Agreements (APA) ininternational taxation and corresponding APA programs in individualcountries. The author notes that the introduction of APA programs andthe generation of APAs are considered to be an example of governancechange and this paper seeks to identify factors which might explainvariation in the evolution of national APA programs and theimplementation of individual APAs between the taxpayer and the taxauthorities.

Markus Brem and Thomas Alexander Tucha paper, "On Transfer PricingConceptual Thoughts on the Nature of the Multinational Firm "(November 2005 Indian Institute of Management Ahmedabad), analyses theshortcomings of mainstream transfer pricing in multinational firms.According to the authors, the mainstream transfer pricing approachderived from the Arm's Length Principle is deemed inappropriate forglobalized MNEs. Referring to the value chain model, the papersuggests that entrepreneurial coordination is the key performancefeature to be used for valuing business activity and for allocating -for tax transfer pricing purposes - standard markups and residualprofits along the value chain.


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