Transfer Pricing in Business Restructurings – Reasoning from Implausible Assumptions Issue Note 2 – (OECD, Discussion Draft)

27 Pages Posted: 21 Jul 2010

See all articles by Richard Thompson Ainsworth

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law

Andrew Shact

Boston University - School of Law

Date Written: July 19, 2010


The OECD’s Center for Tax Policy and Administration roundtable on business restructurings in January 2005 led to a Joint Working Group project later that year on permanent establishments and business restructurings. One of the results was the Discussion Draft on Transfer Pricing Aspects of Business Restructurings that was available for public comment between September 19, 2008 and February 19, 2009.

This paper concerns Issue Note No. 2 in the Discussion Draft – Arm’s Length Compensation for the Restructuring Itself.

Issue Note No. 2 is deeply flawed. It relies on an unproved correlation between structure and performance (profit/loss potential). The Discussion Draft contends that transfers of assets, rights, or risks “carry” profit/loss potential among related parties. What the Discussion Draft fails to see is that a unique, highly valuable intangible is the goal in a restructuring, and this is the primary determinant of profit or loss. The intangible created is a new decision-matrix. Said another way, a business restructuring is no more than an internally directed R&D effort. It should be treated that way. Asset shuffling is secondary, not primary.

Business restructurings are a very common. Nearly half of all CEOs resort to them within the first or second year of their tenure. More than 70% of all restructurings are not successful. The goal of boosting financial results is not achieved. Foresight is inaccurate, success is difficult to predict.

What empirical evidence we do have in business restructurings points to the critical importance of decisions-making (not asset shuffling). Decision effectiveness and financial results correlate at a 95% level or higher for every country, industry, and company.

If business restructurings are all about decisions, making sure the most effective decisions are made, making sure decision-makers are located in places where assets and structures are arranged to facilitate their decisions, then why does the Discussion Draft ignore the decision-making intangible?

Before we add another analytical structure to the Transfer Pricing Guidelines for all business restructurings (not just a structure that would deal with tax abusive restructurings) we need to get the Discussion Draft focused on what business is focused on when they restructure – the decisions.

The Discussion Draft draws examples from the classic patterns of abusive restructurings (the conversion of a fully-fledged manufacturer to a contract manufacturer; the conversion of a fully-fledged distributor to a stripped distributor; the development of shared service centers and contract service providers; and the transfer of intangible assets to off-shore holding companies). This paper relies on a different set of examples – the restructuring of Ford Motor Company in 2006; the restructuring of BP in 2007; and the restructuring of Xerox in 2001. The effort is to demonstrate that there is something more than asset shuffling going on in most restructurings, and the tax rules should start for this premise.

Keywords: Business restructuring, Issue Note No. 2, Transfer pricing, OECD, Decision-making intangible, Decisions, Profit/loss potential, BP pic, Xerox, Ford, Deepwater Horizon, Macondo Well, Anne Mulcahy

JEL Classification: K22, K34, K39

Suggested Citation

Ainsworth, Richard Thompson and Shact, Andrew, Transfer Pricing in Business Restructurings – Reasoning from Implausible Assumptions Issue Note 2 – (OECD, Discussion Draft) (July 19, 2010). Boston Univ. School of Law Working Paper No. 10-19. Available at SSRN: or

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Andrew Shact

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics