Transfer Pricing and State Aid: The Unintended Consequences of Advance Pricing Agreements

Transnational Corporations, Vol. 25(2), pp. 9-36, 2018

Texas A&M University School of Law Legal Studies Research Paper No. 18-45

41 Pages Posted: 12 Oct 2018 Last revised: 23 Oct 2018

See all articles by Lorraine Eden

Lorraine Eden

Texas A&M University - Department of Management

William Byrnes

Texas A&M University School of Law

Date Written: August 13, 2018

Abstract

An advance pricing agreement (APA) is a formal arrangement between a tax authority and a multinational enterprise (MNE) in which the parties jointly agree on the MNE’s transfer pricing methodology, estimated taxable income and tax payments for a fixed period, thus reducing the likelihood of an income tax dispute. We argue that APAs, which were developed by governments to solve MNE-state problems in one realm (international taxation of related party transactions), have had unintended consequences for both parties due to the spillover impacts of APAs into other policy realms. We explore this argument in the European Union state aid cases where, in the context of competition policy, APAs can be viewed as hidden, discretionary policies that can be misused by lower-tier governments to attract or retain inward foreign direct investment by offering individual MNEs preferential tax treatment. Our paper contributes to this literature by analyzing the unintended consequences of APAs and recommending policy changes to reduce these negative spillovers.

Keywords: advance pricing agreement, state aid, transfer pricing, dispute settlement, European Union

JEL Classification: F13, F15, F23, H25, H26

Suggested Citation

Eden, Lorraine and Byrnes, IV, William H., Transfer Pricing and State Aid: The Unintended Consequences of Advance Pricing Agreements (August 13, 2018). Transnational Corporations, Vol. 25(2), pp. 9-36, 2018 ; Texas A&M University School of Law Legal Studies Research Paper No. 18-45. Available at SSRN: https://ssrn.com/abstract=3244058

Lorraine Eden (Contact Author)

Texas A&M University - Department of Management ( email )

415D Wehner Bldg, TAMU 4221
College Station, TX 77843-4221
United States
979-845-4851 (Phone)
979-845-9641 (Fax)

HOME PAGE: http://mays.tamu.edu/mgmt/

William H. Byrnes, IV

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX Texas 76102
United States
(817) 212-3969 (Phone)

HOME PAGE: http://www.linkedin.com/in/williambyrnes/

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