The transfer pricing problem: a global proposal for simplification

This article focuses on the problem of transfer pricing from an international taxation perspective. It elaborates two major points using game theory as a theoretical framework. First, it argues that both developed and developing countries are facing the same fundamental problem in the transfer pricing arena; the meaning of the arm's length standard (ALS) is largely unknowable because of the absence of transfer pricing case law with public good features. Second, this Article proposes a solution to the transfer pricing problem within the ALS framework. The proposal consists of a procedural, rather than a substantive, system in which multilateral advance pricing agreements (APAs) are used to produce a proxy for case law with public good features. The proposal is arguably superior to other options (such as formulary apportionment and consolidated base taxation approach elaborated by the European Commission) because it can be applied by both developed and developing countries and is consistent with the current structure of international taxation. The proposal has been written to facilitate its addition to Article 9 of the OECD Model Tax Convention on Income and on Capital.