About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

2010 World Tax J. 3 (2010)

handle is hein.journals/wldtxjrn2010 and id is 1 raw text is: Reuven S. Avi-Yonah* Between Formulary Apportionment and the OECD Guidelines: A Proposal for Reconciliation In the last 30 years, a debate has been raging in international tax circles between advocates of the OECD Transfer Pricing Guidelines and the arm's length standard (ALS) they embody, on the one hand, and advocates of formulary apportionment (FA) on the other. After the adoption of the 1995 regulations and the new OECD Guidelines, the debate became quieter for a while, because everyone was waiting to see whether the issue had been resolved. However, while there have been few decided cases, it is clear by now that the transfer pricing problem is as bad as it ever was. That is why my co-authors Kimberly Clausing and Michael Durst and I have recently re-proposed adopting FA. However, it is unlikely we will persuade advocates of the ALS and in particular the OECD that FA is the way forward (although this may change if the Obama administration were to press the issue, or if the European Union adopts CCCTB). Thus, I would like to propose a compromise: Use FA in the context of the ALS. Specifically, I would suggest using FA to allocate the residual profit in the profit split method. This article is devoted to (a) explaining the drawbacks of ALS as currently applied, (b) developing the above proposal, and (c) concluding with a plea for further discussion by both sides of the FA/ALS debate. 1. A Historical Introduction In the last 30 years, a debate has been raging in international tax circles between advocates of the OECD Transfer Pricing Guidelines and the arm's length standard (ALS) they embody, on the one hand, and advocates of formulary apportionment (FA) on the other.' This issue can be traced as far back as the 1930s, when the ALS was originally conceived of and introduced into the first model treaties.2 However, before the 1960s there was not much transfer pricing enforcement and the ALS was rather indeterminate in the absence of concrete transfer pric- ing methods. FA, in the meantime, was applied by the US states but was not seriously con- sidered as a method of resolving transfer pricing at the international level. In 1962 the US House of Representatives passed a bill that would for the first time have applied FA to address transfer pricing at the federal level. This was in the context of increas- ing transfer pricing concerns evidenced by the Dupont case (which began in the 1950s, even though it was not decided until 1979) and the enactment of Subpart F, which at least in part responded to such concerns. However, Stanley Surrey, the new Assistant Secretary for Tax Policy and a great believer in the ALS, thought he had a better approach, and the ultimate leg- islation merely authorized the Treasury to write regulations under IRC 482 implementing the ALS. * Irwin I. Cohn Professor of Law and Director, International Tax LLM, the University of Michigan. The author can be contacted at aviyonah@umich.edu. 1. Langbein, S.I., The Unitary Method and the Myth of Arm's Length, 30 Tax Notes (1986), p. 625 et seq. 2. Avi-Yonah, R.S., The Rise and Fall of Arm's Length: A Study in the Evolution of U.S. International Taxation' 9 Finance and Tax Law Review (2006), p. 310 et seq. (updated version of article from 15 Virginia Tax Review (1995), p. 89 et seq.). WORLD TAX JOURNAL FEBRUARY 2010 13

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most