Part 1 - AL-Tax

International Taxation HandbookRiskRoutine functionComparable tasksand functionsComparableNot comparableUncertaintyRiskUncertaintyNonroutinefunctionFigure 7.4Determination of routine and nonroutine functionsas a residual in the company’s profit (cf. Paragraph 3.4.10.2a, AdministrativePrinciples 2005).From a transaction cost economics perspective, a transaction between two partieswill be economically feasible if the contract provides both parties with sufficientsafeguard against hazards. If, however, the governance of a transaction is toocomplex because of transactional hazards, opportunism, and/or unforeseeableincentive structures, the transaction might preferably be internalized and, hence,does not take place between two parties – notwithstanding whether they are membersof the same multinational group or third parties. This is what transaction costeconomics suggests as hierarchical coordination within the same organizationalunit (cf. Sansing, 1999; Oestreicher, 2000; Grossman et al., 2003; Brem and Tucha,2005). Hence, the contractual safeguard deals with the hold-up problem whicharises if specific investments are necessary for generating certain goods or services.From this perspective, it follows that the coordination of goods or services ispreferably carried out within the entrepreneurial unit (integration) if, for example,highly specific assets in physical and/or human capital are necessary and thehazards of opportunistic behavior and incentive structure cannot be governed bymeans of a contract between the two parties. The entrepreneur, hence, seeks togovern the uncertainty by means of hierarchical and internal coordination. Acontractual safeguard of such uncertainty is not possible because an insurer cannotbe found or insurance is economically not sound because of prohibitivelyhigh costs. On the other hand, the transactional relationship between the ‘entrepreneurialunit’ and another related party (or another business unit) of the samemultinational organization is coordinated externally through a contract. 8162