Transfer pricing professionals grapple with applying the separate-entity approach to intragroup transactions in a manner that is consistent with the arm’s length principle and the realities of today’s multinational enterprises. In their new article “Shapley Value in Dispute Resolution: Lessons in Transfer Pricing from a Life Sciences MNE” published in Tax Notes International, NERA Senior Managing Director Dr. Yves Hervé and Texas A&M University Professor Dr. Lorraine Eden argue that when the Shapley value is used as the profit-splitting factor as part of the transactional profit-split method (TPSM), it provides a fair and economically sound solution for allocating system profits among a group of entrepreneurial entities for transfer pricing purposes. The Shapley value can also ensure that transfer pricing outcomes are based on the arm’s length principle and aligned with value creation within the MNE group.

To illustrate this argument, this article utilizes a case study applying the Shapley value in the context of negotiating a bilateral advance pricing agreement for an MNE in the life sciences industry. The authors hope their explanation of Shapley value will have a long, permanent impact on the transfer pricing field by explaining and exploring a method that would further strengthen transfer pricing professionals’ application of the arm’s length principle to today’s MNEs.