No issue in tax has generated more ruckus than Transfer pricing and no where more than in the United States. Manipulation of the TP rules by multinational corporations has always been a blot on the strenuous efforts of IRS to stamp profit shifting to low -tax jurisdictions. To a good extent, the fluidity of ‘arm’s length pricing’ has been contributory. The alternatives don’t appear to give more certainty. One of the alternatives flown at the hearing before the U.S House Committee on Ways and Means in 2010 was the ‘formulary approach”. This is not the first time.
Australia is in the midst of reforming its anti-deferral laws and therefore it is appropriate to take a brand new look at the tax rules affecting transfer pricing.
Various methodologies hammered out so far to determine arm’s length outcomes shadowed by the OECD guidelines leaves most things up in the air and much to be desired. Decisions in the cases of Roche and SNF in Australia have further muddied the waters, not to mention the recent ruling on restructuring and transfer pricing, TR 2011/1.
At a hearing before the U.S House Committee on Ways and Means in 2010 concerning possible changes to sec 482 of the Internal Revenue Code, some of the witnesses revived the formulary approach.
One of the witnesses, Prof. Reuven S. Avi-Yonah who was in favour of using the formulary approach in the context of the arm’s length standard, suggested the three- factor formula ( sales, assets and employees) to apportion the profits. This would exclude intellectual property, which is a significant factor in business arrangements.
In respect of intangibles such as intellectual property Prog Avi-Yonah suggests that ‘cost-sharing’ regulations amended to discourage shifting profits from intangibles developed in the U.S to overseas companies.