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Insights into Transfer Pricing Guidelines (Post-BEPS)

Legal consequences of transfer pricing as outlined by DLS academic Dr Amir Pichhadze

The regulation of transfer prices (i.e. the price of supplies exchanged in cross-border transactions between associated enterprises who are not dealing at arm’s length) has become the leading tax issue which concerns governments and which affects international trade between associated enterprises operating as a multinational enterprise (MNEs). In Australia, for example, the government recently reported that “…related party trade was valued at approximately $270 billion in 2009, representing about 50 per cent of Australia's cross-border trade flows. It is therefore important to confirm that the law is fully effective in the way Parliament has clearly assumed it operates.”

Transfer prices are regulated by domestic law, which requires that the value of the exchanged supplies (goods and/or services) should reflect the value that would have been agreed to in a comparable arm’s length transaction under the same circumstances. If it does not, it could be adjusted to reflect the arm’s length value for tax purposes. The arm’s length value is therefore treated as the acceptable standard (benchmark) for valuation. Adjustment of the value (i.e. the transfer price) may affect the tax consequences of the transaction, which will consequently also affect how taxable income is allocated between countries who may have jurisdiction to tax the associated contracting parties. Mis-pricing of the value of supplies can therefore erode the tax base of affected countries. This is referred to as the Base Erosion and Profit Shifting (BEPS) problem.

Elaborate guidelines on how to carry out this comparability analysis are provided by the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN). Guidelines are also typically provided by domestic tax administrations.

As part of its recent BEPS project, the OECD invited public comments on its proposals for revising its Transfer Pricing Guidelines. My comments alerted the OECD about the need to have the guidelines explicitly acknowledge the necessary role of contractual interpretation law in the transfer pricing arm’s length comparability analysis. Without properly identifying and interpreting the contractual terms, in accordance with the source of private contract law which governs the contract under tax assessment, it is not possible to correctly delineate the contractual terms. Consequently, nor would it then be possible to reliably determine the arm’s length price based on a comparability analysis. I have further elaborated on this issue in an article that was published in the World Tax Journal.

Following public consultation, the OECD revised its guidelines. Notably, the newly revised guidelines now explicitly require “taking into account applicable principles of contract interpretation” when delineating the contractual terms of a controlled transaction. This is an important step in the right direction. As expected, the significance of this change of tides would not, and could not, go unnoticed. Most recently, transfer pricing experts Robert Feinschreiber and Margaret Kent have commented that these revisions to the transfer pricing concepts to contracts “will have a significant impact on affiliated enterprises operating internationally.”

However as my current research reveals, the need for change is not yet complete. Most recently, the UN released its post-BEPS revised manual on transfer pricing for developing countries. Notwithstanding the OECD’s recent post-BEPS revisions, unfortunately the second edition of the UN’s manual continues to be silent about, or overlooks, the necessary role of contractual interpretation in the transfer pricing analysis. There is risk that the same is true with domestic guidelines on transfer pricing. I am therefore urging the UN and domestic tax administrations to follow the steps of the OECD by explicitly acknowledging the need to analyze contractual terms, when conducting the transfer pricing analysis, in accordance with the applicable private international and private contract law – otherwise courts run the risk of making legal errors and failing to correctly and reliably conduct the transfer pricing comparability analysis.  


Dr Amir Pichhadze

Dr Pichhadze comes to the Deakin Law School from Canada. He completed a Doctor of the Science of Law (SJD) as well as an LLM in International Tax both at the University of Michigan Law School. He carried out his research under the supervision of Prof. Reuven S. Avi-Yonah, along with committee members Prof. John A.E. Pottow and Prof. Daniel Crane. The objective of his doctoral thesis was to expose, explain and alert about the necessary role of contractual interpretation in the law of transfer pricing. Prior to his studies at Michigan, he completed a Judicial Clerkship at the Tax Court of Canada and obtained an LLM (Taxation) and LLB both from the London School of Economics and Political Science.

His legal research has been published in peer-reviewed and peer-edited journals and magazines around the world. Some of his articles can be found on the SSRN. Part of his research, which was published in the Bulletin for International Taxation (Vol. 69(9)), was awarded second place in the 2013 Annual Law Student Essay Competition of the American Judges Association (AJA). Forthcoming is a publication in the New Zealand Journal of Taxation Law and Policy as well as a book chapter in The Routledge Companion to Tax Avoidance Research which he co-authored with Professor Reuven S. Avi-Yonah. 

Dr Pichhadze presented his legal research in numerous academic and professional conferences around the world. Most recently, he presented articles at the 5th Annual Tax Administration Research Center (TARC) Workshop; the 8th Queensland Tax Researcher’s Symposium (QTRS);  and the 2017 Australasian Law Teachers Association Annual Conference. His upcoming research work and presentations include:


Contact Dr Amir Pichhadze here


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