![]() ![]() For example, according to the Internal Revenue Service, the most frequently used transfer pricing method for both tangible and intangible property in 2016 was the comparable profits method or the TNM method, which accounted for 89% of transactions.3 The method examines the profit-level indicator (PLI), defined as net profits relative to an appropriate base (e.g. In practice, practitioners heavily rely on the TNM method because of its ease of use. The OECD proposes four different additional methods of exercising the ALP: the cost plus method, the resale price method, the transactional net margin (TNM) method, and the transactional profit split method. In the case of transactions of intangible assets, therefore, it is difficult to apply the CUP method. There may be a genuine difficulty in accurately determining a market price in the absence of market forces or when adopting a particular commercial strategy” (Chapter I: 33). As pointed out by the OECD guidelines, "ax administrations should not automatically assume that associated enterprises have sought to manipulate their profits. For instance, profits shifted to Ireland via royalties accounted for approximately 23% of Ireland’s annual GDP between 20.2 Second and more importantly, finding appropriate fees or royalties of intangible assets is difficult, because there is often no comparable transaction for intangible assets. Thus, MNEs tend to locate their intangible assets in tax havens to minimise tax payments. ![]() First, it is easy to transfer intangible assets across countries without accompanying production. In particular, it is very difficult to audit intra-firm transfers of intangible assets because of the following ambiguous nature of intangible assets. ![]() Reality, unfortunately, is not as simple. It suggests that tax authorities audit tax-avoidance behaviours by comparing the prices used in intra-firm transactions with those of similarly uncontrolled transactions between independent parties (i.e. As a method of exercising the ALP, the comparable uncontrolled price (CUP) method is considered ideal. The member countries of the Organisation for Economic Co-operation and Development (OECD) have cooperated in efforts to tackle artificial profit-shifting by setting guidelines for transfer pricing, in which the arm's length principle (ALP) was specifically proposed. It was reported that Google saved at least $3.7 billion in taxes in 2016 using this method.1 Transfer pricing with intangible assets and the arm's length principle One of the most famous examples of profit shifting through intangible assets is the ‘Double Irish with a Dutch Sandwich’ conducted by Apple, Google, and Facebook, among others. Well known methods of profit-shifting include transfer pricing of both tangible and intangible assets, internal debt, and interest payments. In reality, profit-shifting is executed using highly complex methods. Thus, MNEs have an incentive to manipulate transfer prices for tax planning. transfer prices), there is no market mechanism. With respect to the prices of goods and services within a firm (i.e. This kind of profit-shifting is often conducted via so-called transfer pricing of intra-firm transactions. These tax havens include Ireland, the Netherlands, Luxembourg, Switzerland, Singapore, the Bahamas, Barbados, Bermuda, and the Cayman Islands, among others. (2020), more than $600 billion, which was close to 40% of multinational profits, was shifted to tax havens in 2015. ![]() For example, according to the estimation of Tørsløv et al. 2010, Bauer and Langenmayr 2013, Zucman 2014, Davies et al. Specifically, it has been reported that MNEs often artificially shift their profits across countries to avoid taxation (Huizinga and Laeven 2008, Egger et al. It is well known that MNEs take advantage of differences in corporate tax rates and preferential tax measures provided by various countries. (2020), the share of global corporate profits made by MNEs was about 15% in 2015. Multinational enterprises (MNEs) have a strong presence in the world economy. ![]()
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