Part 1 - AL-Tax

International Taxation HandbookThis chapter examines factors which may explain differences between countriesin terms of the existence of APA programs and the use of individual APAs. It proposesa mechanism to explain the existence of APAs and – as we hypothesize – itstemporary deployment in international taxation. It also reveals possible reasons asto why certain countries have introduced APA programs and what relevance APAsmay play in international taxation in the future. To provide for the contextual natureof APAs, some key features of transfer pricing are presented first.6.2 Transfer pricing and APAsCross-border business between foreign affiliated parties of multinational corporatecompany groups is of increasing importance in today’s business world. Dependingupon the countries involved, a large share of the total cross-border exchangeof business transactions is coordinated within the boundaries of multinationalcompanies (MNCs) at the turn of the 21st century (Feldstein et al., 1995; Owens,1998; The Economist, 2001; European Commission, 2001; OECD, 2001a; Whalley,2001; Neighbour, 2002 (reporting a share of up to 60%)). With the continuingglobalization process in the modern business world, we can expect this proportionto increase significantly for many countries in the near future. Alongside thisdevelopment, several multinational groups have been changing their organizationaland business structures. For example, many MNCs are organized along business linesirrespective of legal entity structures (Buckley and Casson, 2000; Wilkinson andYoung, 2002; Lengsfeld, 2005; Brem and Tucha, 2006).6.2.1 Transfer pricing and MNCsWhile new business structures seem to ignore national borders, taxing incomegenerated through such business is still governed on a national basis throughcountry-specific accounting and taxation principles and provisions allocatingthe jurisdiction’s tax base. The rules vary significantly across different countriesand even between countries within comparatively harmonized economic regions(European Commission, 2001), which are subject to domestic legal and administrativetraditions. This variation in tax rules across national tax jurisdictions (countries)causes different degrees of complexity and uncertainty for both the taxauthority and the taxpayer regarding tax base allocation (cf. Messere, 1993;OECD, 2003). Transfer pricing is a prominent example of such complexity andcontroversy.114