Between Formulary Apportionment and the OECD Guidelines: A Proposal for Reconciliation
Reuven S. Avi-Yonah
University of Michigan Law School
May 29, 2009
U of Michigan Law & Economics, Olin Working Paper No. 09-011
U of Michigan Public Law Working Paper No. 152
While there have been few decided cases under the 1995 Transfer Pricing regulations and the OECD Guidelines, 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 Formulary Apportionment (FA). However, it is clear from the reactions we received that 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 EU adopts CCCTB). Thus, I would like to propose a compromise: Use FA in the context of the Arm's Length Standard (ALS). Specifically, I would suggest using FA to allocate the residual profit in the Profit Split method. The rest of 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.
Date posted: May 29, 2009