Transfer Pricing Of MNEs And Creation, Challenges, Changes, Development Of International Tax Rules

Under the current economic globalization background, MultinationalEnterprises are engaging in “stateless” and “cross-border” economic activitieswhich have given rise to a variety of international tax law issues, Transfer Pricing isone of most prominent issues among them, caused by globalization and intellectualeconomy. By transfer pricing MNEs transfer profits from higher tax rate jurisdictionto lower jurisdiction to minimize their overall tax burden.There are three sets of transfer pricing rules, i.e, the Arm’s Length Principle,Common Consolidated Corporate Tax Base rules and Global FormularyApportionment Method. Arm’s Length Principle is the fundamental one. The OECD,UN and the U.S which represents the other school in international tax law, alladvocate that decision and adjustment of transfer pricing being subjected to thisprinciple. thus making it as a customary international law rule. In recent years, theArm’s Length Principle has been seriously challenged by great increase ofwithin-MNE group business transaction and of intangibles in manufacturing andmarketing. The principle’s limitations has been seen and has caused much criticism.Nevertheless, it is still a main approach in transfer pricing regulation. The globalformulary apportionment method might be alternative to the arm’s length method.However, it needs very high degree of international cooperation, which can neitherbe accepted nor be realized by international community in a short period, even inlong run. The EU’s CCCTB proposal is more modest and it is also the formularyapportionment method’s first application in super-national level. Its main value liesin that it can successfully solve the problems that both the arm’s length method and global formulary method can’t do. Therefore it is a new idea in transfer pricingregulations. The Formula Apportionment Method is domestic law, mainly being usedin most states of the U.S, some provinces of Canada and some countries such asBrazil. Applying it in the international tax law means a method to divide MNEs’ totalprofit among their enterprises in the group. Revenue loss of non-MNEs’ headquartersituating countries are inevitable. This approach has great potential and it is verylikely to be a main method in international transfer pricing. The arm’s length method,CCCTB and global formulary method, each has its rationality and has good and badsides. They will play their roles in regulating transfer pricing in the future.Intangibles get more and more involved in MNEs’ production and management,shaking the basis of transfer pricing rules, causing its changes and evolution. Underthe Arm’s Length Principle, the basis of the three price comparability traditionalmethods (i.e. the Comparable Uncontrolled Price method, the resale price method,the cost plus method) has been seriously shaken and challenged. In order toovercome the difficulties in prices comparing, the profit comparing based methods(i.e. the comparable profit method or the transactional net margin method and theprofit split method) have been developed. With the importance and integrity ofintangible assets in the MNEs’ value-creation, these profit-based methods alsodemonstrate their weakness in transfer pricing regulating. CCCTB and the GlobalFormulary Apportionment method thus attract attention and emphasis, because thetwo approaches treat global income of a MNEs’ in a integrity way, distributingvalues brought about by intangibles in steps in the MNEs producing and marketing.Solving the difficulties in finding comparing objects and evaluation.MNEs conduct transfer pricing to unreasonably allocate costs and risks broughtabout by intangibles and cause serious tax consequences, there are increasing needsfor developing special rules on cost sharing arrangements of intangibles. The “U.S.Cost Sharing Arrangements2011Final Rules and Regulations” aims at regulatingtax related issues on joint development of intangibles among associated enterprises.It represents the latest development at the issue in U.S, or, even in the world. There are some rule-based methods, especially several specific complementarycalculating methods which are targeted at participants’ platform contributions’,including the Income Method, the acquisition price and market capitalizationmethods as well as Residual Profit Split Method etc. These special platformcontribution evaluation rules have further put forward the development of theintangibles’ transfer pricing rules.With economic globalization going in-depth, enterprises of developingcountries and the SMEs have been more and more engaged in transnational andinternational business, they have transfer pricing problems as well.The special challenges brought by transfer pricing for the developing countriesare that, many developing countries haven’t established working transfer pricingrules, if any, there still exists too much abstract principles and lacking of practicalitydefects. In addition, developing countries are generally lacking ability in transferpricing management and experiences. In this context, there are many defects andweak points in the developing countries’ transfer pricing rules’ legislation, lawenforcement and judiciary in general, and these facts have caused the developingcountries large revenue loss and shortage. Making the situation of raising money bytax for development worse. These special difficulties of the developing countrieshave caused attention of international community and developing countriesthemselves. OECD, UN and the EU have got involved in term of doing research,making guidance and taking measures to address the problems.At present，all most all of the developing countries use arm’s length method indealing with transfer pricing problems. Brazil has developed a set of special rulesbased on the safe harbor and fixed formula method. The rules are variants of theFormulary Apportionment Method. It is the first developing country and the firstcountry as well which use to the Formulary Apportionment Method.SMEs’ transfer pricing problem has given rise to tough issue for taxpolicy-makers and taxpayers. EU has developed detailed and practical SMEs transferpricing rules, under their guidance, many EU member countries have conducted legislation on the issue. China has a huge SMEs sector, the above theoreticalresearch, legislation and practices can have many implications for China.China should make specific definitions for SMEs for transfer pricing purpose,simplify SMEs’ contemporaneous documentation requirements to reduce theircompliance burden, while encourage SMEs take an active part in the AdvancePricing Arrangements. Training for tax staffs and tax payers in transfer pricingrelated knowledge also should be carried out.