Compulsory Arbitration in International Transfer Pricing and Other Double Taxation Disputes

Abstract

Substantial portions of international transactions are carried out within Multinational Enterprises ("MNEs"). The prices determined for such transactions are referred to as the transfer prices. Because this pricing determination is being controlled by the MNE itself, it might deviate from the market price ("arm's length" price) to be determined by uncontrolled entities. And if such pricing methods are accepted by the countries involved it would cause national tax losses. As a result, countries have developed laws and rules determining such transfer prices ("The norms"). The problem is that even though such norms in each country tend to rely on the arm's length standard, there is great diversity of such national norms and in their application in reality. Consequently, if two or more countries apply different rules to the same transaction, it is inevitable that economic double taxation will occur. It occurs when one country makes adjustment to the transfer prices, while the other country would not make a corresponding adjustment to such prices. That is so because a portion of the income arising out of the transaction is being simultaneously attributed to the enterprise by the two countries involved, and therefore that portion is being taxed by the two countries, and thus subjecting the MNE to economic double taxation. Despite the convergence of accepted transfer-pricing methods among tax administrations, important differences continue to exist, and the potential for major disputes with MNEs remain. Current progress in the development of international mechanisms for dispute resolution could help in alleviating conflict and hardship.

JEL Classification: K34