The Organisation for Economic Co-operation and Development (OECD) project on base erosion and profit sharing has caused an increased interest in transfer pricing regulations. The recommendations and guidance the OECD gives is interpreted by each nation, and this leads to different regulations in most countries. This leads to country specific transfer pricing regulations and makes it hard for multinational companies to comply with all the changes.
Luckily the TPGenie tool from Intra Pricing Solutions offer country summaries for all relevant Organization for Economic Co-operation and Development (OECD) member countries. This is a great solution to the challenge of keeping up to date on the country specific regulations.
Rules can reduce investment
There has been an increased interest in transfer pricing regulations to mitigate tax avoidance by multinational companies due to the OECD project on base erosion and profit sharing. In 2018 Ruud De Mooij and Li Liu wrote an article on “The Real Effects of Transfer Pricing Regulations” in order to bring empirical evidence about the implications for investment into the conversation. They used data between 2006 and 2014 and used 27 countries as a sample group.
In the study they used purely national companies as a control group, while looking at what effect transfer pricing changes had on investment in multinational companies. They tried to argue that transfer pricing regulation would only affect the cost of capital of the multinational affiliates.
The results of the study were not that surprising. The introduction of transfer pricing regulations reduced investments in multinational affiliates by more than 11%. When these regulations became stricter, the reduction in investment would be even larger than 11%.
What mostly happens when countries impose these transfer pricing regulations is that multinational firms relocate investments toward affiliates in other countries rather than to cut global investment. Thus, transfer pricing regulations induce spill over effects to other countries.
The study found in conclusion that unilateral introduction of transfer pricing regulation will distort the international allocation of capital; and the negative investment effect can make countries reluctant to adopt them or make them more lenient. Binding international coordination can prevent this but might not be beneficial for all countries.
Although transfer pricing regulations might reduce investment, the OECD and countries still impose regulations year on year. The role of the OECD and countries differ in imposing these regulations.
The role of the OECD
The Organisation for Economic Co-operation and Development (OECD) gives guidance and recommendations on a wide range of economic and social policies to its member countries. The international organization consisting of 38 member countries was established in 1961 and aim to promote economic growth, prosperity, and sustainable development. The OECD works to help member and non-member countries address global challenges and achieve better economic and social outcomes through policy analysis, data collection and dissemination, and peer reviews. The OECD is recognized for their high standards of policy analysis and evidence-based research they use to suggest policies.
However, the implementation of these recommendations on policy changes is not mandatory for the member countries. Each member country has the flexibility to adopt and adapt them according to their own needs and priorities. As a result, member countries can deviate and change from the OECD’s recommendations, depending on their specific circumstances and national interests. For instance, a country may choose to adopt different tax policies or regulatory frameworks than those recommended by the OECD based on its domestic economic, social or political considerations.
Moreover, the OECD periodically reviews and updates its recommendations and guidelines based on new research and emerging trends. Therefore, member countries may need to adjust their policies to align with the updated recommendations or may choose to deviate from them, based on their evaluation of the potential benefits and costs. While the OECD provides a valuable framework for guiding policymaking among its member countries, each country has the flexibility to implement its own set of rules that reflect their unique circumstances, preferences, and priorities.
Why would countries have deviating Transfer Pricing Regulations?
The OECD guidelines are respected by most members, but they still choose to implement their own set of rules. There are various reasons for countries to implement their own rules:
- The first reason would be that every country has a unique political, economic and social context. This may require them to differ in their approach and ask them to deviate from the guidelines the OECD recommends.
- The second reason is that the interpretation of rules are context and country specific. As an example, most countries agree with the OECD guidelines on corporate governance that want to promote transparency, accountability, and responsibility among companies. The specific requirements and the implementation of details however differ from country to country.
- The third reason is that countries might deviate from the OECD guidelines in order to intentionally achieve policy goals. A country might impose certain trade polices going against the OECD in order to protect some domestic industries with the goal to achieve a particular trade balance. Countries might also focus on certain tax policies that differ from the OECD guidelines to incentivize foreign investment and economic growth.
- The fourth reason could be that due to the OECD guidelines that changes from year to year, this could lead to devations by member countries. As the global economic context evolves, the OECD may revise its guidelines to better reflect the changing landscape. In such cases, member countries may need to adjust their policies accordingly, which could result in deviations from previous years.
In conclusion, while the OECD provides guidelines and recommendations to promote economic development and trade, member countries have the freedom to implement their own set of rules based on their unique economic, social, and political contexts. These deviations could be intentional to achieve specific policy goals or a result of changes in OECD guidelines from year to year. Ultimately, the key to effective economic development and trade is to strike a balance between following international best practices and implementing policies that best serve the country’s interests.
The solution for keeping up to date on Transfer Pricing Regulations
Intra Pricing solutions offer their TPGenie as the problem solver. This user-friendly tool is updated regularly with all relevant OECD country summaries. This is essential as countries will keep deviating from the OECD guidelines in order to serve their own specific agendas. The software can be used by Multinational enterprise groups, Law firms, Tax advisors and Accounting companies. Having these country summaries will certainly give your company and edge and save you time and money.
- Ruud De Mooij and Li Liu, 2018. At A Cost: the Real Effects of Transfer Pricing Regulations. IMF Working Paper.
- UN Manual on Transfer Pricing (2017)