The United Nations’ effort to shape global transfer pricing policy – By George L. Salis, Principal Economist & Tax Policy Advisor, Vertex, Inc., King of Prussia, Pennsylvania

The 19th Session of the United Nations Committee of Experts on International Cooperation in Tax Matters was held October 15-18 in Geneva.

This session, like the prior one, mainly focused on the role that taxation is playing in raising domestic resources to finance sustainable development goals, as recently set forth in the Addis Ababa Action Agenda.

It is evident that the work of the UN Tax Committee essentially speaks to those pressing issues in taxation related to the sustainable development goals, the informal economy, and environmental taxation, as well as to other vital areas such as the taxation of the digitalized economy;  dispute avoidance and resolution; the relationship between tax, trade, and investment treaties; challenges confronting developing nations;  and, of course, transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of....

Regarding the current state of international taxationFOR MORE INSIGHT ON INTERNATIONAL TAXATION, PLEASE READ THIS ARTICLE: Introduction to International Taxation: Key Concepts & Guidelines International Taxation encompasses the framework of laws, principles, and treaties that govern the tax obligations of individuals and entities engaged in economic activities that span multiple jurisdictions. This field addresses how income, profits, and gains are taxed when operations or investments extend..., most countries will follow one of two sets of international transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... guidelines.

If a country is a mature economy or a developed nation, it will adhere to the OECD’s Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Guidelines for Multinational EnterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... and Tax Administrations, which was last updated in 2017, just a couple of years after the unveiling of the outcomes of the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve.../G20 base erosion and profit shiftingBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... (BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode...) action plan.

However, if the country is a developing nation or within the least developed country category, it will follow the United Nations Practical Manual on Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... for Developing Countries. Although the manual was refreshed in 2017, during this year’s 18^th Session of the UN Committee of Experts on International Cooperation in Tax Matters, the subcommittee on transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... proposed the upcoming update to this Manual.

Traditionally a remnant of 20^th-century international trade economic theory, and partly as a result of the era’s globalization, developed nations were capital exporting countries, while those lesser developed were deemed to be capital importing countries. Today, these economic classifications have arguably been blurred to some extent, but this reality persists in many cases and often confronts any traveler to regions such as Africa, the Caribbean, and the FarFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... East, making the sense of inequality even more evident today than years past. 

While the fundamental goals and ultimate objectives stated in the BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... action plan are commonly shared by both the UN and the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve..., the fiscal policy focus, motivation, incentives, and economic direction are not the same. Still, both objectives reflect that unpredictable global economic slowdown and the unstable market conditions that can abruptly arise have created a sense of urgency for developing nations, perhaps even more so than for wealthier countries.  

Coincidentally, in July 2015, around the same time, the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... was getting ready to initiate the BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... action plan, the UN held its 3^rd International Conference for Financing for Development in Addis Ababa, Ethiopia.

It was here that the Addis Ababa Action Agenda for financing sustainable development and developing sustainable finance was unveiled. This agenda includes a comprehensive set of policy actions by the Member States, with a package of over 100 concrete measures to finance sustainable development, transform the global economy and achieve the sustainable development goals, as well as a new global framework for financing sustainable development that aligns all financing flows and policies with economic, social and environmental priorities and ensures that financing is stable and sustainable. This also serves as a guide for actions by governments, international organizations, businesses, civil society, and philanthropists.

It is this agenda that has now become the raison d’etre, or the primary motivation, incentive, and focus, of the UN’s Department of Economic and Social Affairs and the UN’s Committee of Experts on International Cooperation in Tax Matters, as one of the Addis Ababa Action Agenda Initiatives is to “enhance international tax cooperation to assist in raising resources domestically.”

Accordingly, the 2019 Financing for Sustainable Development Report, led by the UN and including the International Monetary Fund, the World Bank Group and World Trade Organization, which jointly called for an overhaul of the global financial system, recognized that the private sector’s interest in sustainable finance is growing and playing a large role in embracing the agenda and its sustainable development goals.

 It is recommended that tax professionals working in the area of international tax policy, specifically transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... in developing countries, carefully review Chapter II. A [on] Domestic Public Resources, and 1. [its] Key Message and Recommendations. This will greatly amplify one’s understanding of the fundamental tenets of the current international tax architecture, along with its fast-moving trends in revenue and taxation.

The 2019 Report further indicates that:

Revenue is not an end in itself; it is a means for Governments to finance the expenditure necessary to achieve sustainable development and policy goals. The fiscal system plays several roles. It finances the provision of public goods, sets incentives for the behaviour of private actors, and promotes equity.  It also supports macroeconomic stabilization and can be used to stimulate growth during economic slowdowns.  While median tax-to-gross-domestic-product (GDP) ratios have increased, there is still a large gap between public resources and financing needs to achieve the Sustainable Development Goals (SDGs).

It is with this rationale and objective in mind that the work of the UN Tax Committee advances. Therefore, we anticipate the eventual release of updates to its Practical Manual on Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Manual for Developing Countries with further work on Article 9 (Associated Enterprises) and, most notably, the new Chapter B on Financial Transactions.

As of November, the OECD’s draft guidance on financial transactions has yet to be finalized; however, the UN Tax Committee appears to be on target for releasing its new Chapter B on financial transactions.

According to the UN draft, among other items, the new Chapter B includes the interaction with rules and measures against base erosion, common types of intra-group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions, the process and system of credit rating and potential transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... methods, including the use of simplification measures/safe harbours; different types of intragroup loans and relevant characteristics and determining the arm’s length nature of intra-group loans; different types of intragroup financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and other available methods.

The chapter also discusses cash poolingCash Pooling is a treasury management strategy used by multinational enterprises (MNEs) to optimise cash flow and liquidity across their corporate group. It involves centralising the cash balances of different subsidiaries into a single account or consolidating them virtually to manage liquidity more efficiently. Cash pooling helps reduce external borrowing costs, earn better interest on consolidated balances, and streamline cash... practices and captive insurance without further detailing the delineation and arm’s length pricing of those specific transactions.

Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length of them: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken, as well as the (iii) selection and (iv) application of the most appropriate transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... method.

Although several recent articles also highlight key differences between these sets of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... guidelines, most notably is Shiv Mahalingham’s Bloomberg Tax article where he emphasizes that a number of countries within the Middle East and North Africa have not signed the BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... Inclusive framework. He also adds:

“The tone of the UN Manual is more supportive of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... advisory, design, and planning, whereas the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... Project approaches regulations as a response to aggressive tax planningAggressive tax planning (ATP) refers to strategies employed by individuals or corporations to minimise their tax liabilities, often by exploiting legal loopholes, discrepancies between tax jurisdictions, or complex structures in tax law. While not always illegal, ATP can push the boundaries of acceptable tax behaviour, as it may compromise the intent of the law. ATP is commonly characterised by arrangements....”

Mahalingham effectively explains that the so-called Sixth Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Method currently incorporated into the UN Transfer PricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... Manual has had successful application as:

“is applied in practice in many Central and Southern America regimes and considers quoted prices of the commodities market that may be comparable uncontrolled prices (CUPs) for transactions with related parties (under similar circumstances).” 

The 2019 Financing for Sustainable Development Report recognizes that the international tax environment has changed over the past decade, specifically in the last five years, acknowledging that norm-setting is more inclusive and additional information is now available on financial accounts and corporate activity, although profit shiftingProfit Shifting is a strategic practice employed by multinational enterprises (MNEs) to reduce their global tax liability by shifting profits from high-tax jurisdictions to low- or no-tax jurisdictions. The primary method involves transferring income-generating activities, intangible assets, or other high-value components within the group to countries with favourable tax regimes. Profit Shifting is a critical concern for tax authorities and... remains a challenge.

On the other hand, as we strive to comprehend the requirement of two sets of international transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... guidelines, and with the emergence of the digital tax regime under Pillar One of the new Unified Approach, we should consider this critical statement from the Report’s Chapter II. A [on] Domestic Public Resources:

“The international tax architecture needs to continue to be more inclusive and the voices of all countries need to be part of discussions on setting new tax norms. It is in the global interest to seek a consensus, but it needs to reflect the realities and priorities of different countries. It is critical to pay attention to the potential impact on small and poor countries, who already lag behind in their ability to raise revenue. Putting the needs and capacities of these countries at the forefront of analysis and decision-making would help create a fairer international tax system and advance sustainable development.”