The OECD Transfer Pricing Guidelines and Value Creation
� Income Allocation or Anti-Avoidance Tool?
   
 
Författare:Screpante Mirna
Titel:The OECD Transfer Pricing Guidelines and Value Creation � Income Allocation or Anti-Avoidance Tool?
Utgivningsår:2024
Omfång:360 sid.
Förlag:IBFD
ISBN:9789087228637
Produkttyp:Inbunden
Typ av verk:Akademisk avhandling
Serie:IBFD Doctoral Series nr. 68
Ämnesord:Skatterätt , Internationell rätt
Pris: 1839 SEK exkl. moms

 

The book conducts a critical assessment of the modifications made to the OECD Guidelines concerning intangibles, examining how these changes influence profit shifting, the concept of value creation and anti-avoidance measures within the framework of the arm’s length principle.

Why this book?
This book critically assesses the updated guidance on intangibles outlined in chapters VI and I of the OECD Guidelines. This evaluation is conducted in the context of the base erosion and profit shifting (BEPS) initiative Actions 8-10 Final Reports. The primary objective is to determine the extent to which the modifications introduced in the 2010 OECD Guidelines (now the 2022 OECD Guidelines) align with the OECD’s intentions and effectively test the concept of “taxation where value is created”. The overarching goal is to curtail the “artificial” tax planning potential associated with the arm’s length principle (ALP), which seeks to ensure that multinational corporations pay taxes in line with the economic activities they undertake.
To achieve this, the book delves into the novel concept of value creation and the emphasis on “taxation where value is created”. It seeks to understand the implications and interpretations of these concepts in the context of the ALP.

Additionally, the book aims to anticipate and potentially define any emerging limits on what is considered permissible and impermissible in terms of “new” tax avoidance strategies. The book highlights the need for a reasonableness test in the ALP to address abnormal or unnecessary value-creating features. This involves scrutinizing whether the modifications can effectively deter the shifting of profits from jurisdictions where economic functions are performed to low-tax regions.
In essence, this book contributes to the ongoing discourse on international tax policy and transfer pricing guidelines. It endeavours to shed light on whether the changes introduced by BEPS, as reflected in the updated OECD Guidelines, will indeed serve as a robust mechanism to combat tax avoidance strategies, thereby aligning taxation more closely with value creation in the global economy.

Finally, this book reveals the intricate interplay between the DEMPE concept, Pillar One and the minimum global tax proposed in Pillar Two. Collectively, they establish a comprehensive framework for combating tax avoidance and advancing equity in the realm of taxation.

Author(s)
Mirna S. Screpante is an international tax adviser who actively participates in the field of international taxation. She serves as a speaker at various tax events and has authored numerous articles and books on the subject.

Table of Contents

Acknowledgements 1
Foreword 3
List of Abbreviations 7

Part I
Introduction

Chapter 1 Introduction 11

1.1. Context and background of the study 11
1.1.1. Transfer pricing rules as a tool to segregate taxable
income 11
1.1.2. The BEPS Project and Actions 8-10 16
1.1.3. The problem of artificial segregation of profits 19
1.2. Aim of the book 21
1.3. Relevance of the book 26

Chapter 2 Research Questions and Structure of the Book 31
2.1. Hypothesis and research questions 31
2.2. Structure of the book 33
2.3. Methodology 38
2.4. Terminology and formalities of citations 39

Part II
The “Paradoxical” Paradigm of the Arm’s Length Principle

Chapter 3 Conceptual and Practical Implications of the Arm’s
Length Principle as a Profit Allocation Tool in Tax
Structuring: The Seeds of Artificial Segregation 43

3.1. Introduction 43
3.2. Historical (hypothetical) allocational and antiavoidance-based approach to the allocation of profits 45
3.2.1. The Carroll Report and the 1933 Draft Model
Convention 47
3.2.2. The US regulations 50
3.3. Historical (factual) fractional-based approach to the
allocation of profits 54
3.3.1. The International Chamber of Commerce proposal 55
3.3.2. The League of Nations Reports 58
3.3.3. Formulary apportionment of profits as a proposal 61
3.3.4. The OECD PSM: The arm’s length formulary principle 65
3.3.5. Fractional apportionment under OECD Pillar One 68
3.4. The rationale of the ALP 77
3.4.1. ALP as a profit allocation discipline 78
3.4.2. ALP as an anti-avoidance discipline 82
3.5. Tax structuring based on the (hypothetical)
allocational but not on the anti-avoidance-based
approach of the ALP 89
3.5.1. Tax structuring with intangibles profit-shifting
planning models 90
3.5.2. The role of tax structuring with commonly accepted
patterns 92
3.5.3. The functionality of IP structuring 93
3.5.4. Alternatives for tax structuring with intangibles in
an allocational-based profit model 96
3.5.4.1. The royalty structure 97
3.5.4.2. The cost sharing structure 99
3.5.4.3. The principal/centralized entrepreneur structure 100
3.5.5. A unified result for allocational-based profit models 100
3.6. Interim conclusions 102

Chapter 4 The Post-Base Erosion and Profit Shifting Arm’s
Length Principle Reinforces Typical Intangibles
Profit Shifting Tax Planning 105

4.1. Introduction 105
4.2. Intangibles: Importance, definition and types 107
4.2.1. Importance of intangibles within the OECD
framework after Actions 8-10 108
4.2.2. Definition and types of intangibles according to the
OECD Guidelines 111
4.2.2.1. Hard intangibles 111
4.2.2.2. Soft intangibles 113
4.3. The Actions 8-10 modification to the OECD Guidelines 116
4.3.1. The requirement of the “accurate delineation of the
transaction” 118
4.3.2. The requirement of control and financial capacity
over risk 126
4.3.3. The actual conduct of the parties vis-à-vis DEMPE
functions 130
4.3.4. The role of legal ownership vis-à-vis the “actual
conduct of the parties” 135
4.3.5. Actions 8-10: A “more explanatory” guidance of the
OECD Guidelines 139
4.4. Practical impact of Actions 8-10 on the OECD
Guidelines 140
4.4.1. The IP Licence Model: An illustrative framework 141
4.4.2. The IP Licence Model as an optimization model 142
4.4.3. The core elements of the IP Licence Model 146
4.4.3.1. Preliminary phase: IP transfer under a cost-sharing
arrangement 147
4.4.3.2. Secondary phase: centralized legal ownership and
funding of IP 147
4.4.3.3. Final phase: IP intra-group outsourcing 148
4.4.4. Optimization of the IP Licence Model tax position
after Actions 8-10 148
4.5. The paradox of attribution of profits to intangibles
based on DEMPE functions 151
4.5.1. The role and impact of DEMPE functions in MNEs 152
4.5.2. The origins of the problem of profit shifting 155
4.6. Interim conclusions 160

Part III
Rethinking the Interpretation and Application of the Arm’s
Length Principle in Light of Value Creation: The Reinforcement
of the Anti-Avoidance Approach

Chapter 5 Current Normative and Interpretative
Framework of the Arm’s Length Principle in
Light of the “as accurately delineated principle” 165

5.1. Introduction 165
5.2. Interpretational conceptual framework on tax avoidance 169
5.2.1. The meaning of “tax avoidance’ within and beyond
the BEPS initiative 171
5.2.1.1. BEPS initially intends to define “tax avoidance”: no
common underlying principle 171
5.2.1.2. A general definition of “tax avoidance”: a common
underlying concept 176
5.2.1.3. The anti-avoidance purpose of Actions 8-10 as a
mirror of the anti-avoidance non-discrimination test
under EU law 180
5.2.1.4. The ALP in light of EU law “artificiality”: A brief
lesson for the ALP under the OECD Guidelines (2022) 183
5.2.2. The meaning of tax avoidance as an international
standard in transfer pricing 188
5.3. Normative framework (de lege lata) of (non)-
recognition and recharacterization of transactions 190
5.3.1. International framework on non-recognition and
recharacterization of transactions 193
5.3.1.1. (Non)-recognition and recharacterization under
article 9(1) of the OECD Model 193
5.3.1.1.1. Article 9(1) has not merely a profit allocation
purpose but also one of tax avoidance 194
5.3.1.1.2. Article 9(1) is neither restrictive nor expansive and
non-exceptional concerning transactional adjustments 201
5.3.1.1.3. Article 9(1) cannot enforce autonomously
transactional adjustments, but it is not merely
illustrative 206
5.3.1.2. (Non)-recognition and recharacterization of
transactions under the OECD Guidelines (2022) 208
5.3.1.2.1. A general – not exceptional – anti-avoidance
standard for (non)-recognition of the transaction 210
5.3.1.2.1.1. The “as accurately delineated principle” as a
standard – not exceptional – to not recognize the
actual transaction as undertaken and recognize a
new hypothetical transaction 212
5.3.1.2.1.2. The “as accurately delineated principle” is merely a
soft law guidance and does not function as enabling
domestic law 217
5.3.1.2.2. Commercial rationality as a general rule for (non)-
recognition and recharacterization of transactions:
not exceptional? 221
5.3.2. Domestic law framework for non-recognition and
recharacterization of transactions undertaken 224
5.3.2.1. (Non)-recognition and recharacterization under
domestic legislation and the OECD Guidelines 225
5.3.2.2. (Non)-recognition and recharacterization under
GAARs and transfer pricing rules as SAARs in light
of the “as accurately delineated principle” 227
5.3.2.3. Jurisdictional analysis on (non)-recognition and
recharacterization 231
5.3.2.3.1. Canadian legal basis of non-recognition
(recharacterization) of transactions undertaken 231
5.3.2.3.1.1. Recharacterization in case law: AgraCity (Cameco
doctrine) 233
5.3.2.3.1.2. Author’s view on the impact of the “as accurately
delineated principle” of the OECD Guidelines
(2022) as an interpretative source in domestic tax law 237
5.3.2.3.1.3. Author’s view on the interplay of the Canadian
GAAR and the OECD Guidelines (2022) as a
jurisprudential interpretative source 241
5.3.2.3.2. Australian legal basis of non-recognition
(recharacterization) of transactions undertaken 244
5.3.2.3.2.1. Recharacterization in case law: Glencore Investment
Pty Ltd (Chevron doctrine) 245
5.3.2.3.2.2. Author’s view on the impact of the “as accurately
delineated principle” and commercial rationality of
the OECD Guidelines (2022) as part of domestic law 249
5.3.2.3.2.3. Author’s view on the interplay of the Australian
GAAR and the OECD Guidelines (2022) as
domestic tax law 254
5.3.2.3.3. Spanish legal basis of non-recognition
(recharacterization) of transactions undertaken 256
5.3.2.3.3.1. Recharacterization in case law: BICC and Peugeot 257
5.3.2.3.3.2. Author’s view on the impact of the “as accurately
delineated principle” of the OECD Guidelines
(2022) in domestic tax law as a source of interpretation 262
5.3.2.3.3.3. Author’s view on the interplay of the Spanish GAAR
and the OECD Guidelines (2022) recognized in
domestic tax law as a source of interpretation 263
5.3.2.3.4. Italian legal basis of non-recognition
(recharacterization) of transactions undertaken 265
5.3.2.3.4.1. Recharacterization in case law: Henraux and ItalCo 266
5.3.2.3.4.2. Author’s view on the impact of the “as accurately
delineated principle” of the OECD Guidelines
(2022) in domestic tax law as the main reference 270
5.3.2.3.4.3. Author’s view on the interplay of the Italian GAAR
and the OECD Guidelines (2022) in domestic tax
law beyond a source of interpretation 271
5.4. Interpretational proposal (de lege lata) of the “as
accurately delineated principle” of transactions
under the OECD Guidelines (2022) 273
5.4.1. The “as accurately delineated principle” under
article 9(1) of the OECD Model 273
5.4.2. The “as accurately delineated principle” under
domestic transfer pricing rules 275
5.5. Interim conclusions 277

Chapter 6 Proposed Interpretative and Normative
Framework of the Arm’s Length Principle in
Light of the Functional (i.e. DEMPE) FormulaBased Value Creation Standard 283

6.1. Introduction 283
6.2. Descriptive and conceptual framework of value creation 286
6.2.1. Value creation from a political perspective 286
6.2.1.1. The concept(less) notion of value creation (“taxation
where value is created”) 287
6.2.1.2. The function of “taxation where value is created”
under the OECD BEPS initiative 291
6.2.2. Value creation from an economic perspective 296
6.2.2.1. An inherent friction between economic theory and
statutory tax rules 296
6.2.2.2. Value creation as an (economic) expression of the
principle of origin 305
6.2.3. Value creation vis-à-vis the single tax principle 310
6.2.3.1. Value creation, the single tax principle, Pillar One
and Pillar Two 315
6.3. Interpretative and normative framework of value
creation 317
6.3.1. Value creation as a reinforcement of a substancebased approach and a new source convention 318
6.3.2. The functional (i.e. DEMPE) formula-based value
creation standard as a merely indicative allocation of
profits 324
6.3.3. The functional (i.e. DEMPE) formula-based value
creation standard with an anti-avoidance approach 328
6.3.3.1. Assessment under the “as accurately delineated
principle” as an objective anti-avoidance standard 331
6.3.3.1.1. The functional (i.e. DEMPE) formula-based value
creation standard concerning people 333
6.3.3.1.2. The functional (i.e. DEMPE) formula-based value
creation standard concerning risks 337
6.3.3.1.3. Practical issues when applying the “as accurately
delineated principle” as an objective anti-avoidance
standard 341
6.3.3.2. Assessment under the “commercial rationality
principle” as a subjective anti-avoidance standard:
Fall and rise of the “as accurately delineated principle”? 343
6.3.4. Author’s view on the functional (i.e. DEMPE)
formula-based value creation standard as a new
interpretation of the ALP 347
6.3.4.1. Does the functional (i.e. DEMPE) formula-based
value creation standard constitute a new paradigm
for the application of the ALP? 347
6.3.4.2. Does the functional (i.e. DEMPE) formulabased value creation standard really change the
interpretation of the ALP? 350
6.3.4.3. Is the functional (i.e. DEMPE) formula-based value
creation standard compatible with article 9? 356
6.3.4.4. What does it mean to apply the functional (i.e.
DEMPE) formula-based value creation standard
correctly to gain consistency with the ALP and
article 9? 357
6.3.5. Proposal how to enhance the ALP in light of the
functional (i.e. DEMPE) formula-based value
creation standard and the international standard on
tax avoidance 361
6.3.5.1. The proposal: A “reasonableness test” for
recognition of the transaction 362
6.3.5.2. Application of the “reasonableness test” for
recognition of the transaction 369
6.4. Interim conclusions 373

Chapter 7 Conclusions and Recommendations: Transfer
Pricing Rules within the Arm’s Length Principle
or Beyond? 379

7.1. Main findings and conclusions 379
7.1.1. Conclusions on the conceptual and practical
implications of the ALP as an allocation of profits
tool in tax structuring 381
7.1.1.1. The anti-avoidance and fractional allocational
aspects of the post-BEPS ALP are not something
new: The past meets the present 381
7.1.1.2. The ALP necessarily serves as an allocation of
profits tool, but it unequivocally needs an antiavoidance approach to properly allocate profits in
line with commercial or financial relations 382
7.1.1.3. Tax structuring based merely and exclusively on the
(hypothetical) allocational approach of the ALP got
it wrong 383
7.1.2. Conclusions on the post-BEPS ALP reinforce typical
intangibles-profit-shifting tax planning 383
7.1.2.1. The shifting of profits is inherently flawed in its
orientation exclusively towards the ALP’s tax focus 383
7.1.2.2. The OECD Guidelines (2022) are a better
clarification but not enhanced explanatory guidance:
They indicate that an anti-avoidance approach is not
merely observable but explicitly necessary for the
ALP’s effective application 384
7.1.2.3. The functional (i.e. DEMPE) formula-based value
creation standard reinforces formulistic tax planning
that triggers a paradoxical effect 385
7.1.3. Conclusions on the current normative and
interpretative framework of the ALP in light of
the “accurately delineated principle” as an antiavoidance reinforcement 386
7.1.3.1. A priori, the OECD Guidelines (2022) conception
of non-reproachable tax avoidance becomes
a posteriori reproachable tax avoidance as an
international standard in transfer pricing: Two sides
of the same coin 386
7.1.3.2. ECJ jurisprudence as a justification of the antiavoidance approach of the OECD Guidelines (2022)
contributes to reinforcing the ALP as the applicable
principle within the OECD Guidelines (2017) and
not value creation 387
7.1.3.3. The “as accurately delineated principle” serves as a
not exceptional but ordinary anti-avoidance standard
for non-recognition of transactions: The myth of the
single recharacterization circumstance under the
OECD Guidelines (2022) 388
7.1.3.4. The term “accurately delineated principle” could
be interpreted as acknowledging a transaction as
a hypothetical analytical reference rather than an
actual structured transaction 388
7.1.3.5. The “as accurately delineated principle” with the
commercial rationality test is not merely a step in
the functional analysis: Both serve as a transfer
pricing special anti-avoidance rule; However, their
application depends on the incorporation of the
OECD Guidelines (2022) into domestic tax law 389
7.1.4. Conclusions on the proposed interpretative and
normative framework of the ALP in light of the
functional (i.e. DEMPE) formula-based value
creation standard 391
7.1.4.1. Value creation lacks an inherent normative
significance and as such is alone a meaningless
notion, but it has a meaningful functionality
directionally in transfer pricing analysis if
understood constructively concerning the objectives
served by the ALP 391
7.1.4.2. The functional (i.e. DEMPE) formula-based value
creation standard revitalizes the origin principle ad
factum partially 391
7.1.4.3. Value creation attempts to define a universal de facto
source origin-based standard for transfer pricing
purposes 392
7.1.4.4. Value creation is only a priori as a suitable notion for
the materialization of the principle of single taxation 392
7.1.4.5. The functional (i.e. DEMPE) formula-based value
creation standard allows for an evidence-based
assessment based on nexus-functional connections to
allocate income 393
7.1.4.6. Value creation enables a new interpretation of the
application of the ALP within the established status quo 395
7.1.4.7. The ALP is the principle applicable, not functional
(i.e. DEMPE) formula-based value creation standard 395
7.1.4.8. Legal arrangements ought to be respected to be in
line with the ALP and can be determined to serve
necessary and commercially directed outcomes;
The functional (i.e. DEMPE) formula-based value
creation standard is merely a guiding instruction for
substance 396
7.1.4.9. The “as accurately delineated principle” effectively
gives rise to a new “best-transaction rule” ad libitum
tax authorities 397
7.1.4.10. Profit shifting to low-tax jurisdictions is not per se
a cause for concern unless transactions have a nongenuine purpose or role; Solving distorted income
allocation solely according to the ALP insufficiently
addresses the responsibility of corporate groups to
account for and explain the functional necessity and
normalcy of their legal arrangements 397
7.1.4.11. A transaction to be recognized shall not merely be
accurately delineated and commercially rational,
but it ought to be reasonable in its circumstances
and will serve outcomes that are not otherwise
achievable in taxpayers’ commercial and
organizational contexts 398
7.1.4.12. The reasonableness test serves to enable the
ultimate discipline of article 9 to achieve an
undistorted allocation of income 399
7.2. Further recommendations 400
7.3. Final reflection: OECD Pillars One and Two
reaffirm the formulary and anti-avoidance approach
of the ALP 401

References 405
 
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