The OECD’s Base Erosion and Profit Shifting (BEPS) project promises to make effective inroads into the much criticized corporate tax strategy known as aggressive transfer pricing, whereby the profitability of subsidiaries in different jurisdictions is “managed” via mispricing with the intent of minimizing the corporation’s overall tax burden. ![]() These proposals involve new profit allocation rules that go beyond the arm's-length principle. Two of the proposals under pillar 1 of the Inclusive Framework's 2019 short policy note involve the use of the residual profit-split method to allocate profits. Nevertheless, the residual profit-split method is being considered for BEPS action 1, on the taxation of the digital economy. ![]() Consequently, it is likely that the profit-split method will rarely be the most appropriate transfer-pricing method. In the revised guidance, the threshold requirements for the use of the profit-split method are still restrictive. Under the former guidance, the profit-split method was used infrequently. The revised guidance expressly states that the lack of comparable uncontrolled transactions, by itself, is not a basis for the use of the profit-split method. Regrettably, the revised guidance failed to provide the opportunity for the profit-split method to be more often the most appropriate transfer-pricing method. In 2018, the Organisation for Economic Co-operation and Development/Group of Twenty (OECD/G20) Inclusive Framework on base erosion and profit shifting (BEPS): action 10 issued revised guidance on the transactional profit-split method. This book is the most detailed and up-to-date publication on this highly topical and often controversial topic. It identifies those issues on which the BEPS output has been positive, and also those issues which BEPS has not successfully addressed and which remain problematic. ![]() Having described the pre-BEPS rules and inherent problems, the book goes on to examine the extent to which the work undertaken by the BEPs project provides a solid foundation for future transfer pricing determinations and the problems that remain after BEPS. The issues highlighted include problems relating to the complexity of the rules, the use and availability of comparables, and, in particular, problems permitting avoidance and income shifting, including problems related to low tax entities with 'excessive capital'. It provides how internationally accepted transfer pricing rules were applied immediately prior to the BEPS project, and describes the principal problems that had arisen with those rules. The book considers the nature and scope of transfer pricing rules based on the arm's length principle starting with an explanation of how the rules were created and and how they evolved over time. This is the first book to present a sustained analysis and critique of arm's length based transfer pricing rules following the G20 / OECD Base Erosion and Profit Shifting (BEPS) project.
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