The challenges for developing countries of implementing the ALP in practice

This paper seeks to assess the (highly practical) matter of whether the OECD’s BEPS project has helped, or alternatively hindered, the task for developing countries of applying transfer pricing rules pursuant to the arm’s length principle (ALP). The focus of the paper is on states with limited resources with which to administer the tax system in general and the transfer pricing rules in particular.

The paper discusses the fact that material tracts of the BEPS output were arguably of only distant relevance in the context of the immediate, mainstream issues facing developing states. Nonetheless, the effect of the transfer pricing changes that are relevant to developing states is to introduce material complexity into the required administration of the transfer pricing rules. For example, the revised approach from BEPS places a much greater emphasis on the actual conduct of the parties. This increased importance of actual conduct clearly makes the process of administering the transfer pricing rules significantly more onerous.

The paper analyses a number of other developments in the BEPS project that are considered to be helpful to the position of developing states. However, there are two factors which in combination will prove highly problematic for developing countries. First, there is the inevitable escalation of sophistication in the transfer pricing techniques used by (at least some) multinational companies, which will presumably then require corresponding responses by tax authorities, leading in turn to more sophisticated multinational responses, and so on. Second, there is the task of dealing with the ever- increasing complexity in what is required to comply with the ALP. The paper argues that this complexity needs to be addressed in its own right. Given their higher reliance on corporate income tax and challenges with developing resources to administer the ALP, this is a debate in which developing countries have a special interest.

Richard Collier, “The Impact of the OECD/G20 Base Erosion and Profit Shifting Project on the Task for Developing Countries of Applying the Arm’s Length Principle in Practice”, Bulletin for International Taxation, 2018 (Volume 72), 4/5.