TEI comments on UN Transfer Pricing Manual.

• Position: Tax Executives Institute

On March 7th, 2014, TEI submitted comments to the United Nations regarding the United Nations Practical Manual on Transfer Pricing for Developing Countries. TEI recommended, among other things, that the United Nations continue to support the arm's length principle for transfer pricing purposes, respect contractual arrangements among members of a multi-national enterprise when those arrangements are consistent with their substance, and keep in place the current international tax system for determining ownership of intangible assets within a multi-national group. TEI's comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Nick Hasenoehrl of Herbalife. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's comments.

In 2012, the United Nations Committee of Experts on International Cooperation in Tax Matters (the Committee) published its United Nations Practical Manual on Transfer Pricing for Developing Countries (UNTPM or Manual). At the time of publication, the Committee noted that the UNTPM is a living document, to be regularly revised and improved. In that regard, the Committee formed a Subcommittee on Article 9--Associated Enterprises (Subcommittee) to further develop the UNTPM, specifically with respect to intra-group services and management fees as well as intangibles. The Subcommittee invited comments on these and other aspects of the UNTPM earlier this year. On behalf of Tax Executives Institute, Inc. (TEI or the Institute), I am pleased to respond to the Subcommittee's call for comments regarding the UNTPM.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 55 chapters around the world. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 members represent over 3,000 of the largest companies in Asia, Canada, Europe, and the United States.

1. Overall Comments on the UNTPM

   TEI commends the Committee for its development and publication of the UNTPM, as well as its continuing work to improve and update the Manual. The UNTPM represents an important advance in addressing the needs of developing countries with respect to transfer pricing rules and practices. TEI recognizes and appreciates that the UNTPM generally addresses a different, but not completely separate, audience than the OECD's Transfer Pricing Guidelines (OECD Guidelines) and thus must emphasize different points and approaches in certain cases. Nevertheless, TEI urges the United Nations and the Committee to adhere as closely as possible to the OECD Guidelines while further developing the UNTPM. Significant differences between the two documents will only lead to cross-border transfer pricing disputes between nations that follow the two different approaches, leaving taxpayers caught in the middle and facing the prospect of significant double taxation.

2. Principles

   The UNTPM rightly focuses on risk assessment (see UNTPM Chapter 8). As a threshold matter we note that the vast majority of multi-national enterprises (MNEs) report all their revenue and profit and create, maintain, and adhere to robust transfer pricing compliance and documentation policies as part of their internal controls. Thus, most transfer pricing disputes that arise between MNEs and tax authorities around the world involve good-faith differences in interpretation of transfer pricing principles as applied to bona fide commercial transactions. From this perspective, most MNEs should be viewed as "low-risk" when it comes to transfer pricing compliance.

   As correctly stressed under Paragraph 2.4.8. of the UNTPM, most MNEs have developed a global and consistent transfer pricing policy aimed at reducing transfer pricing controversy and the potential for double taxation. MNEs design their transfer pricing policies for worldwide standardization and consistency by applying the OECD Guidelines. This is currently the only accurate and efficient manner for MNEs to pay their fair share of taxes in each country without suffering double taxation. Thus, the transfer prices of MNEs are based upon the arm's length principle and the underlying economics of their business endeavors.

   As a general matter, TEI strongly supports harmonization of the UNTPM with the OECD Guidelines. Discrepancies between the UNTPM and the OECD Guidelines would mean that the UNTPM is effectively a second set of rules. This would be contrary to the UNTPM's clearly stated intention, and create additional complexity, uncertainty, and a material likelihood of double taxation where there is no applicable double taxation treaty.

   In this regard, TEI emphasizes the following principles and observations:

   1. Chapters I-III and IX of the OECD Guidelines stress that legal rights and contractual arrangements between related companies form the starting point for any functional analysis of transactions between such parties. They also form the keystone of Article 9 "Associated enterprises" of the OECD Model Tax Convention. The importance of contracts and the conduct of the parties are recognized in the UNTPM at Par. 5.3.2.30. TEI emphasizes that an understanding of the...