Why the OECD's approach to transfer pricing is a joke

January 17th, 2012

TJN has been long been a critic of the OECD’s Arm’s Length system for addressing transfer pricing shenanigans (see TJN’s summary of what is involved here). A system that might have worked well enough 70 years ago is not fit for purpose today.

About a year ago TJN published two articles summarising longer papers in Tax Notes by Michael Durst, former head of the U.S. Internal Revenue Service (IRS) Advance Pricing program and a world authority on the subject. This blog is a reminder of those two important articles. In the first, entitled The OECD Should Reevaluate Transfer Pricing Laws, Durst states that

“the current system is based on faulty assumptions regarding the way multinational business is conducted, so that the system, no matter how hard one seeks to reform it, simply is not capable of functioning acceptably.”

In the other article, The Two Worlds of Transfer Pricing Policy Making, Durst argues that the OECD’s Arm’s Length method:

“is based on a fundamental misunderstanding of practical economics.”

He also notes the strength of the lobbying effort in favour of the current arrangements.

I have frequently observed it at close hand, and I believe it has been influential. The effectiveness of lobbying efforts has been enhanced, I believe, by the absence of any financially interested constituency that might serve as an effective counterweight and therefore as a political force for changes to current laws.

And there is much more to consider in those two articles. Once again, the two summaries are here and here. Important contributions to the debate, from a leading expert.

Further discussion of the shortcomings of the OECD’s system, and the proposition of alternative systems, is available on the TJN Transfer Pricing page.

Written by Nicholas Shaxson

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