Transfer pricing comparables “toolkit” reflects realities of developing nations, UN official says

by Julie Martin

A new “toolkit” which considers how developing nations can address the lack of comparables in transfer pricing, released jointly by the UN, OECD, IMF, and World Bank Group last June, reaffirms that the arm’s length approach can work for all nations but is also an imperfect, “not scientifically pure,” document, a UN official said July 18.

Michael Lennard, UN Chief of International Tax Cooperation and Trade in the Financing for Development Office, said that the transfer pricing toolkit is designed to counter arguments, advanced by NGOs and others, that formulary apportionment is the only viable transfer pricing solution for developing nations.

“This is a very important response to that. [It says] arm’s length is alive; it can work for developing countries even if you don’t have local comparables,” said Lennard, who spoke at a National Association for Business Economics (NABE) conference.

Regional, foreign comparables

Lennard said the toolkit tries to “nudge” countries towards accepting regional and foreign comparables with adjustments.

The toolkit also specifically states, though, that further work still must be done to establish whether or not foreign comparables are actually relevant, he said.

Lennard acknowledged that this last point has drawn a lot of criticism, including from commentators such as former OECD official Andrew Hickman.

Lennard asserted, though, that the toolkit’s view reflects reality. “The evidence is not there regarding the relevance of European data to Nigeria,” he said.

Alejandro Barran of the Servicio de Administracion Tributaria, Mexico, agreed. He said that emerging economies are significantly different from normalized economies because they tend to be riskier. Using comparables from normalized economies may not yield reliable results, he said. Barran also said while the toolkit’s discussion about adjustments for foreign comparables is helpful, there is no way to prove that these yield an arm’s length result.

Barran noted that while the US stock exchanges list thousands of companies, there are only about 140 publicly traded companies in Mexico. A typical analysis yields no comparables, he said.

Sixth method

The toolkit also addresses the pros and cons of prescriptive rules like the sixth method for commodities dealing.

Whether you like it or not, the sixth method is “on the move,” Lennard said, noting that Zambia has adopted the method and other African nations are likely to follow.

According to Lennard, it is “impossible” to tell a developing nation that it can’t use the sixth method. One can urge careful use of the method and can encourage tax administrations to act fairly, he said. He also said that many variations of the sixth method are being used, which is frustrating.

“Maybe the concept of a CUP is slightly changing, but the important thing is that we don’t lose adherence to arm’s length pricing,” he said.

Secret comparables

Lennard said that the toolkit does not state that developing countries should not use secret comparables.

“You just can’t tell that to developing countries,” he said, noting that Norway uses secret comparables and that their use has been approved by a Norwegian court.

The goal of the toolkit is to encourage countries to use secret comparables in a way that is fair to taxpayers, he said.

Profit splits without comparables

Lennard also said that, contrary to the urging of some commentators, developing nations will not agree that transactional profit splits cannot be used in the absence of comparables.

“That would mean well over half the countries in the world couldn’t do profit splits,” he said. He also said that any such push would invite global formulary apportionment.

Barran acknowledged that Mexico uses a rule of thumb to apply profit splits without comparables. He said he did not think it is appropriate to change a method just because of a lack of comparables. Mexico wants to avoid non-arm’s length prices, but the risk is there, he said.

Barran also said that while the toolkit discusses safe harbors, Mexico’s experience is that safe harbors do not necessarily reflect an arm’s length result and can lead to double taxation. Safe harbors only work when negotiated with a counter party abroad, he said.

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.

Martin has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.

Julie Martin


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