Contents - AL-Tax

1 Introduction 3Certain of these assets are not ordinarily bought and sold individually at arm’slength. At the other extreme, the Internet has spawned entire industries, such asContent Delivery Network (CDN) services providers, that entail the provision ofservices on a worldwide basis and require the location of network infrastructureassets in all major geographic markets. The absence of any meaningful division oflabor itself creates a transfer pricing conundrum, as those familiar with the globaltrading of commodities and financial instruments will immediately recognize.This book is organized into three main parts and a concluding section. Part I containsa detailed review of the economic premises that underpin individual transferpricing methods. More particularly, Chapter 2 contains a brief overview of the keydifferences between economic and accounting measures of profit rates and the “bigpicture” practical implications of substituting accounting measures for economicmeasures in the transfer pricing regulations. Chapter 3 contains an overview ofindividual transfer pricing methodologies currently in use, the implicit economicrationale for each, and the reasons that such economic justifications do not holdwhen accounting rates of return (and other accounting measures of profitability) aresubstituted for economic profit rates, or when certain implicit assumptions aboutmarket structure are not warranted.Part II contains a discussion of certain proposed alternative transfer pricing methods.The first such method is simply an extension or reinterpretation of the inexactcomparable uncontrolled price method. The second, third and fourth methodspresuppose that the legal entities comprising a multinational corporation performdistinct functions. The last two proposed methods presuppose that all legal entitiesconstituting a multinational corporation perform the same range of functions andemploy similar types of assets. These proposed methods have a more solid economicfooting than existing methods and can be applied to certain transfer pricing issuesthat the extant transfer pricing regimes do not effectively address.Part III, consisting of Chapters 5 through 12, contains a series of highly detailedcase studies. Where feasible, individual case studies contain an analysis of the subjectintercompany transactions under both the existing regimes and the proposedalternative regime, and a review of their relative merits. Where the fact patterntypified by a particular case study is not adequately addressed under the existingtransfer pricing regimes, the analysis is limited to proposed methods. The case studiesencompass a broad range of industries, both traditional and new, and are basedon actual cases. All specific numerical results cited in these case studies have beenaltered, relative to the actual cases on which they are based, to preserve confidentiality.Moreover, certain key aspects of the underlying fact patterns have been changed.In some instances, features of more than one industry have been blended to maintainconfidentiality. As such, background information on the cited industry should not betaken at face value.Tax policy-makers, business school students and tax practitioners are the targetaudience for this book. Policy-makers should find the critique of existing transferpricing regimes of particular interest, insofar as it elucidates how and why theseregimes contribute to (a) extremely high compliance costs; (b) frequent disputesover transfer pricing issues; and (c) the limited efficacy of existing dispute resolution