Pacific Association of Tax Administrators' transfer pricing documentation package: September 5, 2002.

On September 5, 2002, TEI President Drew Glennie submitted a letter to Carol Dunahoo, Director of International for the Internal Revenue Service, and Tom Crowe of the International Directorate of Canada Customs and Revenue Agency, commenting on a transfer pricing documentation package developed by the Pacific Association of Tax Administrators (PATA). PATA's members consist of Australia, Canada, Japan, and the United States. TEI's comments were developed under the joint aegis of its Canadian Income Tax Committee, whose chair is Monika M. Siegmund of Shell Canada Ltd., and the International Tax Committee, whose chair is Bruce R. Maggin of IBM Corporation. Contributing to the development of TEI's comments were Carmine A. Arcari and Camille Glover of RBC Financial; Margaret A. Curry and Eric P. Turner of General Motors Corporation; David V. Daubaras of GE Canada, Inc.; Stephen J. H. Drielsma of Manulife Financial; Guy A. Kersch of Pharmacia; Lisa Norton of Amazon. com; and William E. Ramirez of Philip Morris International.

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Canada Customs and Revenue Agency (CCRA) and the United States Internal Revenue Service (IRS) have solicited comments on a proposed transfer-pricing documentation package developed by the Pacific Association of Tax Administrators (PATA), which includes Australia, Canada, Japan, and the United States as its members. On behalf of Tax Executives Institute, I am pleased to submit the following comments.

Background

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 5,300 professionals manage the tax affairs of 2,800 of the leading companies in Canada, the United States, and Europe and must contend daily with the planning and compliance aspects of business tax laws in PATA member countries as well as in other jurisdictions. TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa and Washington, as well as in the provinces and the states, to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government.

Overview and General Comments

PATA members have endeavored to develop a set of principles and document guidelines pursuant to which multinational taxpayers may create and maintain a single package of transfer-pricing records and documentation (hereinafter the "PATA documentation package") in order to satisfy the transfer-pricing documentation requirements of all PATA members. By providing a uniform transfer-pricing documentation package, PATA's goal is to facilitate the efficient preparation and maintenance of transfer-pricing documentation thereby enabling the timely production of such information upon request by tax auditors.

TEI commends PATA for recognizing the need to develop guidance to enable multinational taxpayers to satisfy the PATA countries' transfer-pricing documentation requirements. The multiple, highly nuanced, and sometimes conflicting, interpretations of the arm's-length standard reflected in the substantive transfer-pricing rules and administrative requirements of various jurisdictions impose significant compliance burdens on taxpayers. Indeed, adherence to the arm's-length standard and administrative practices of a single jurisdiction is more art than science. Thus, we applaud PATA's objectives and support the development of uniform, multilateral guidance for taxpayers and tax administrators. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, especially the guidance in Chapter 5 relating to documentation, provides a useful model for such multilateral agreements. The OECD guidelines set forth a number of principles that balance the tax administrator's need for documents against the cost and administrative burdens to the taxpayer of creating or obtaining the documents. While the PATA document states that "[i]t is considered that this documentation package is consistent with the general principles outlined in Chapter 5" of the OECD's guidelines, we urge PATA to continue to work toward the paradigm expressed in the OECD guidelines and encourage PATA to recalibrate the balance struck in the current draft of the documentation package.

Harmonization of Transfer-Pricing Rules. The PATA documentation guide notes that "each PATA member has different legal systems, statutes, regulations and administrative approaches with respect to transfer pricing." Thus, the documentation package acknowledges, but does not address, the root cause of compliance burdens encountered by multinational national enterprises: inconsistency among various jurisdictions either in the substantive transfer-pricing rules or in their administration, especially in respect of how the taxpayer's compliance with the arm's-length standard is to be evaluated. In the absence of uniform or closely harmonized substantive rules and consistent administrative practices, a uniform documentation package alone will neither materially assist taxpayers in demonstrating the arm's-length nature of their pricing nor significantly ease their documentation burdens. Hence, we encourage PATA to expand the scope of its discussions to address the need for standardization of the underlying substantive transfer-pricing rules. Moreover, we encourage PATA to coordinate with the OECD in respect of uniform and consistent multilateral guidance in respect of transfer-pricing rules, documentation requirements, and penalty standards. The OECD guidelines were developed in consultation with taxpayers and governments and, while not wholly satisfactory, reflect a balance among myriad competing...