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The OECD Approach to Transfer Pricing: A Critical Assessment and Proposal

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Fundamentals of International Transfer Pricing in Law and Economics

Part of the book series: MPI Studies in Tax Law and Public Finance ((MPISTUD,volume 1))

Abstract

The OECD approach to assessing transfer prices relies on the arm’s length principle. The intra-firm transaction is compared to a market transaction. However, this comparison is conceptually flawed because market prices for intra-firm transactions rarely exist. As a consequence, the identification of comparable transactions requires data that are often unavailable. The lack of relevant data provides considerable room for maneuvering. A survey of the empirical literature confirms that the OECD approach is associated with profit-shifting opportunities and, in particular, with high double taxation risks and assessment costs. We suggest a decrease in the complexity of current transfer pricing rules. We propose a transaction-based apportionment method that combines a fixed standard profit margin with apportionment of residual profits. Reliance on a small set of easily observable and measurable factors to assess transfer prices reduces compliance and enforcement costs as well as double taxation risks.

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Author information

Authors and Affiliations

  1. University of Mannheim, Mannheim, Germany

    Hagen Luckhaupt

  2. Goethe University Frankfurt, Frankfurt am Main, Germany

    Michael Overesch

  3. University of Mannheim, Mannheim, Germany

    Ulrich Schreiber

Authors
  1. Hagen Luckhaupt
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  2. Michael Overesch
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  3. Ulrich Schreiber
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Editor information

Editors and Affiliations

  1. for Tax Law and Public Finance, Business and Tax Law, Max Planck Institute, Marstallplatz 1, Munich, 80539, Germany

    Wolfgang Schön

  2. for Tax Law and Public Finance, Public Finance, Max Planck Institute, Marstallplatz 1, Munich, 80539, Germany

    Kai A. Konrad

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Luckhaupt, H., Overesch, M., Schreiber, U. (2012). The OECD Approach to Transfer Pricing: A Critical Assessment and Proposal. In: Schön, W., Konrad, K. (eds) Fundamentals of International Transfer Pricing in Law and Economics. MPI Studies in Tax Law and Public Finance, vol 1. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-25980-7_6

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