Location Specific Advantages: A Rising Disruptive Factor in Transfer Pricing

Abstract

This paper provides a critical analysis of the potential significance of the notion of location specific advantages in transfer pricing. It explains why China proposed this notion and how China has attempted to apply the notion in its transfer pricing assessment. It suggests that this notion can be a disruptive factor in applying the arm’s length principle embedded in transfer pricing rules. This is because the existing methods for implementing the principle relies on using comparable, transactional pricing methods, which look at factors of production controlled by the taxpayer, not factors that are location-specific outside the control of the taxpayer.

Keywords: transfer pricing, location specific advantages, China