Contents - AL-Tax

54 4 Some Alternative Approaches to Transfer Pricingnot solely by using them essentially “as is” to directly establish transfer pricesbetween affiliated companies. The particular ways in which one can use arm’s lengthpricing data is very much fact-driven and difficult to characterize in the abstract. Asnoted, the first case study (in Chapter 5) illustrates one such application, but it is byno means exhausive.4.2 Numerical StandardsAs previously noted, the current transfer pricing regime imposes significant compliancecosts on multinational corporations. To demonstrate that they have made agood faith effort to comply with the arm’s length standard, and thereby minimizethe likelihood of double-taxation and penalties, multinational firms routinely commissionextensive transfer pricing studies every several years, and frequently haveupdates done in the interval. In addition to the explicit costs of such studies, whichcan be quite high, they entail significant opportunity costs in the form of seniorexecutives’ time and attention. Tax authorities also incur enormous costs in auditingindividual multinational firms’ treatment of their transfer pricing issues after thefact, and resolving conflicts with tax authorities in other jurisdictions. Lastly, theendemic uncertainty engendered by the existing transfer pricing regime requiresfirms to hold additional financial resources in reserve and may bias investment decisions,inasmuch as effective tax rates across jurisdictions may not be accuratelyanticipated.Through their transfer pricing studies, corporations with very similar fact patternsindividually recreate the wheel over and over again. However, confidentialityand antitrust concerns generally preclude coordination among firms. Taxing authoritiesare not constrained by such concerns, though, and could readily pool theirknowledge and experience to the end of establishing numerical norms regarding themargins, markups or royalty rates that certain routine activities (e.g., distributionand specific types of services) and relatively common intangible assets (e.g., trademarks)should command. 1 The use of such norms would greatly reduce compliance,audit, dispute resolution and other costs. Moreover, numerical norms would be equitableif such norms were uniformly applied by different tax authorities. Numericalstandards do not address the theoretical shortcomings associated with the resaleprice, cost plus and comparable profits methods. Rather, this approach is put forthin recognition of the fact that genuinely arm’s length results are time-consumingand difficult to develop, and perhaps such efforts should be reserved for the morecomplex transfer pricing issues.This proposed numerical approach, if adopted at some point in the future,should be somewhat more nuanced than the term suggests. More particularly, taxingauthorities could conduct annual benchmarking studies, by industry and geographic1 Tax authorities currently utilize similar rules of thumb during the audit process as a means ofdetermining whether a transfer pricing issue exists, and, if so, whether it is worth pursuing.