Value Creation, Comparability and Bargaining Analysis: Key References in Transfer Pricing Going Forward

01 May 2014
Edited by Dr. Emmanuel Llinares and Sébastien Gonnet with contributions from Dr. Harlow Higinbotham, Dr. Vladimir Starkov, Bastian Gottschling, Dr. Alexander Voegele, and Pim Fris

Transfer pricing is facing drastic changes. In a world where physical location is eclipsed by virtual business models, tax authorities are struggling to exercise their rights to tax "their" parts of the income from multinational business activities. The gap between what countries perceive as their fair share and what they can actually seize is growing larger and larger. With taxation rights being based on location and historic notions of taxable presence, countries feel that they are losing grip on the most valuable elements in the activities of multinational businesses operating within their borders, particularly intangibles.

The changing character of transfer pricing becomes visible in the work at OECD -- on business restructurings, on permanent establishment taxation, and on intangibles, currently under discussion. It is also reflected in disputes and case law the world over, and in the claims of emerging economies. The recent publication of the UN Transfer Pricing Manual illustrates the broad scope of concern in advanced and advancing countries alike.

Concepts that are the key references in transfer pricing going forward are value and value creation, with identification of the respective contributions thereto of group entities concerned, and comparability and bargaining analysis as essential links between value creation and the allocation of profits to geographies for taxation purposes.

The shift of focus in transfer pricing is from local entities, as such, to the role and place of these entities in the total corporate value chain. This shift is demanding more intense compliance activity from business, in terms both of deeper analytical justification of transfer pricing policies and more meaningful and transparent documentation. It requires the deployment of a new analytical tool set and, understandably, meets considerable resistance from business. The climate, however, in which transfer pricing compliance has been discussed to date, has changed dramatically as a consequence of the BEPS Action Plan, made public last July by the G20. This plan that confronts practices from multinationals perceived as base erosion and profit shifting has created a sense of urgency and a call for potentially radical new paradigms that were seen as too demanding heretofore.

Over the years, experts from NERA's Global Transfer Pricing Practice have published numerous articles on these themes. Several of the articles have been collected in book publications issued in 2007 and 2009. At this moment of shifting practices in transfer pricing, we have looked into more recent publications of NERA authors on the themes that define transfer pricing now. The selection that we offer you here contains the following.

A first set of articles has "intangibles" as their shared focus. NERA's recent comments to OECD in respect of the new draft for the Intangibles Chapter in the OECD TP Guidelines confirm the essence of value creation and value chain analysis as the relevant analytical framework and indicate the need to upgrade the Chapters on functional and comparability analysis. Further perspectives are given in different articles on value and valuation of intangibles in circumstances of high uncertainty and on the basic features of bargaining analysis. 

The second set of articles is built up around the theme of "comparability" in challenging situations. Both the perspective of emerging economies and the effect of fluctuations in the economic climate are being looked at in more detail. Where it is of immediate interest in relation to emerging and developing economies, the subject of Location Specific Advantages (LSA) potentially presents an important tool in the attribution of income among developed countries as well. The NERA articles concerned are often cited as classics already.