Defenders of the status quo: Making sense of the international discourse on transfer pricing methodologies

The OECD’s Transfer Pricing Guidelines remain the dominant revenue calculation methodology for tax authorities around the world, despite the existence of simpler methods. In their latest article, Dr. Fritz Brugger and Dr. Rebecca Engebretsen put forth a Discourse Network Analysis based framework that explains how supporters of the existing corporate tax structure strategically undermine alternative methods while enhancing their own credibility as the standard-bearers in matters of tax administration.

Transfer pricing is a complex tax planning strategy employed by multinational companies (MNCs) operating across multiple jurisdictions. The ‘true’ price of transactions between an MNCs subsidiaries can be difficult to establish for tax authorities, leaving room for tax avoidance that deprives host countries of potential revenues. Traditionally, transfer pricing has been the domain of developed countries, with the OECD taking the lead on establishing acceptable transfer pricing practices and assessment methods. A core tenet of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TPGs) is that the price of an MNC’s cross-border transactions should be comparable to those carried out between independent entities. 

There is common understanding that the TPGs are complex, resource intensive, and administratively burdensome to apply, and that they come with significant discretion in the application of the arm’s length principle as  a comparability-analysis has to be done for each and every transaction. Critics argue that both complexity and discretion are to the detriment of developing countries. While a few developing countries have advanced rule-based simplified methods as an amenable alternative for resource constrained jurisdictions, their consensual adoption has remained contentious. We explain the puzzling persistence of the OECD’s methods by analyzing the discussions on this topic using Discourse Network Analysis. We examine the discourse on transfer pricing methods and the involvement of various actors, ranging from the OECD, UN and civil society organizations to MNCs and accounting firms, from the advent of the TPGs in 1995 until the end of 2018.

We find that an epistemic community of tax professionals centering around the OECD tax department and their various fora where (member states’) tax authorities and the private sector (MNCs) meet drives the conversation about best practices, with an evident incentive in propagating methods suited to their best interests. Initially, there was no serious engagement by this community on adapting the TPGs to account for the needs of developing countries, but even the discussions that followed over time were undone by the community’s strategy that involved interceding as credible policy makers and involving external actors to exhibit inclusivity. The first part of their strategy entailed undermining the credibility of the simpler methods by questioning the accuracy of the rule-based approach which could create further discord in the international tax governance domain. Additionally, to buttress their position as the prime authority in facilitating the negotiations over the architecture of international corporate taxation, the epistemic community opted for opening up some of their processes and fora. This allowed (potential) critics of the OECD’s TPGs to participate, albeit on unclear terms, but it also prevented alternative platforms where these issues could be raised – as for example the UN –from gaining strength. 

Our study offers impactful insights into the politics of international tax governance. By analyzing and revealing the discursive strategies used by different actors in protecting their interests, we provide an understanding of their modus operandi which can be informative for other domains in the international tax arena, such as taxing the digital economy. 

Link to article coming soon.

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