ANALYSIS: The Demise of the Arm’s-Length Principle? Or How to Make the Arm’s-Length Principle Workable

Last June the Organization for Economic Cooperation and Development held a two-day consultation with the business community on its Discussion Draft on the Transfer Pricing Aspects of Business Restructurings. The discussion draft, issued in August 2008, outlines the OECD’s guidance on the application of transfer pricing principles to business restructurings.

Three examples at the end of the document illustrate the application of the guidelines in various business restructuring scenarios and demonstrate situations in which tax administrations would recognize, or not recognize, business restructurings as structured.

The discussions in the consultation raised a certain amount of debate regarding the value or necessity of examples, with some delegates questioning whether examples were useful at all or whether they were detrimental if consensus could not be reached. While this author raised many questions about the conclusions given in the examples, these questions were raised not to suggest that the examples were flawed, but rather to demonstrate the difficulty in applying subjective guidelines to actual situations. In fact, these examples served their purpose by taking the guidelines out of the abstract and subjecting them to scrutiny under real-life situations.

The questions raised by a critical examination of the examples provide the opportunity to re-evaluate the proposals made in the discussion draft and the guidelines that will result, with a view to modifying, clarifying, or even in some cases discarding certain proposed guidelines if they prove impractical.

This article examines in greater detail the application of the guidelines to the examples, answers the questions raised by this author during the consultation, and recommends changes to certain elements of the guidelines in the discussion draft. Enjoying this article? To continue reading you need to take out a FREE trial to the Transfer Pricing Library.




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