Risk Transfer Valuation in Advance Pricing Agreements between Multinational Enterprises and Tax Authorities

29 Pages Posted: 4 Apr 2012

See all articles by Zvika Afik

Zvika Afik

Ben Gurion University

Yaron Lahav

Ben-Gurion University of the Negev

Date Written: March 15, 2012

Abstract

Advance pricing agreements are long-term contracts between multinational taxpayers and tax authority(ies), according to which the taxpayer consents to use the agreed upon transfer price for its related transactions for a fixed period of time. We argue that for such an agreement to be based on the principle of arm’s length, the specified transfer price(s) should include a premium that captures the risk transferred from one entity to another. When this risk is not accounted for, the long-term transfer pricing policy specified in the agreement (although supported by tax authorities) is not arm’s length. We present a pricing model that can be easily applied to value such risk and provide an example using real data from U.S. industry.

Keywords: Transfer Pricing, Advance Pricing Agreement, Risk Valuation, Multinational Enterprise, Intercompany Transaction

JEL Classification: G38, K29, K34, M41, M42

Suggested Citation

Afik, Zvika and Lahav, Yaron, Risk Transfer Valuation in Advance Pricing Agreements between Multinational Enterprises and Tax Authorities (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2034170 or http://dx.doi.org/10.2139/ssrn.2034170

Zvika Afik

Ben Gurion University ( email )

Yaron Lahav (Contact Author)

Ben-Gurion University of the Negev ( email )

Department of Business Administration
P.O. Box 653
Beer Sheva 84105, 84105
Israel
972-8-6479738 (Phone)
972-8-6477691 (Fax)

HOME PAGE: http://www.yaronlahav.com

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