Elizabeth Stevens Talks to Law360 on OECD Tax Proposals

Law360 Tax Authority

The Organization for Economic Cooperation and Development’s three current proposals for allocating a multinational’s profits offer a preview of what its highly anticipated unified approach might look like, including how the taxation framework could depart from long-held transfer pricing norms.

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“Some say that companies are cheating the system and not appropriately applying the arm’s-length principle, using transfer pricing planning to avoid truly arm’s-length results,” said Elizabeth Stevens, a Member of Caplin & Drysdale and vice chair of the ABA tax section’s transfer pricing committee. “I think there is also an element of dissatisfaction with the results of arm’s-length. Some countries don’t think they’re getting enough.”

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Stevens, however, said that while she and other tax practitioners tend to prefer arm’s-length, companies may actually prefer a formulary approach.

“For companies, it would probably be easier to write a single check and then have the governments divvy it up,” she said. “For the most part, I think they are indifferent to where they pay tax — they’d just like, to the extent possible, to limit the amount that they pay and be certain of the amount due.”

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In a similar vein, Stevens said she expects the unified approach to be some sort of formula. For example, she said there could be a formula where X — which represents what’s allocated to the market jurisdiction — equals A plus B plus C.

Under this formula, “A” might be a routine return that’s determined using traditional transfer pricing methods, including looking at comparable transaction between unrelated parties. But then “B” is a formulary element that starts with a percentage, Stevens said.

“For example, we could look at global sales and we apply some percentage or formula to determine the nonroutine component of profit,” she said. “We might then use one or multiple factors, basically formulary apportionment, to allocate that slice of income.”

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“A formula that is made up of ad hoc components and percentages is not inherently stable in the same way as an idea that is linked to something real that you can go and see in the world, [such as] market transactions,” Stevens said.

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