Research On Transfer Pricing Aspects Of Business Restructuring

Cross-border restructuring usually involves redeployment of functions, assetsand/or risks of a multinational enterprise between its subsidiaries or relatedenterprises. Faced with the increasing pace of economic globalization and theinternational competitive, multinational corporations keeps restructuring its resourcesand subsidiaries in order to achieve economies of scale and synergies, becauseeffective business restructuring in line with the company’s international strategy willhelp improve integration of internal resources, reduce the tax burden and expandprofits. Due to difference in tax rates, tax jurisdictions, as well as the existence ofvarious tax havens, multinational companies tend to shift profits associated with therisks and assets from high tax rate jurisdictions to low tax rate jurisdictions. In theprocess of cross-border restructuring, it also involves the assessment of risks andassets, determination of arm’s length compensation. As the main purpose of somecross-border restructuring turned out to be tax evasion and it will violate the arm’slength principle, cross-border restructuring is under hot debate.Organization for Economic Co-operation and Development (OECD) has beenfocusing on the issue ofcross-border restructuring and released Transfer pricingaspects of business restructuring discussion draft for public comment in2008andpublished Transfer pricing guidelines for MNE and tax administrations. Chapter9ofthe guidelines refers to special consideration for risks, arm’s length compensation forthe restructuring, remuneration of post-restructuring controlled transactions and recognition of the actual transactions undertaken, giving instructions as to how to usethe commercial rational principle and apply the arms’ length principle in cross-borderrestructurings. In this paper I have spare efforts to analyze the rules and regulations,legal practice concerning cross-border restructuring across the world and give somesuggestions to the enterprises.This paper is divided into four parts:The first part defines the basic concepts of cross-border business restructuringand transfer pricing. First, it analyzes the form of business restructuring and thechanges of functions, assets and risks in the process of several typical way of businessrestructuring. It then analyzes the transfer pricing aspects of cross-border businessrestructuring, including the basic principles of transfer pricing and methods of transferpricing adjustments.The second part focuses on the special considerations for risks. First, it analyzesthe importance of written terms of the contracts, as well as the standards how IRS inthe United States and OECD see the level the consistence between the businessrestructuring and the terms of the contract.It then Determines whether the allocationof risk, functions and assets in the controlled transaction is arm’s length both whenthe comparable data available and unavailable.The third part is about the arm’s length compensation for the cross-borderbusiness restructuring. First, the concept of compensation is explained, and this articlepoints out that restructuring must be commercial rationale. Then the transfer offunctions and assets in the process of business restructuring is analyzed. Finally, itanalysis the re-allocation of risks and profit potential, as well as choose of method oftransfer pricing adjustments.The fourth part is conclusion of the foregoing parts, indicating the dilemma oftaxpayer of cross-border business restructuring. It also mentioned the historicalbackground and development of rules and regulations concerning cross-borderbusiness restructuring in China, giving advice and suggestions.