Public Finance in the Real World: Through the Lens (Down the Rabbit Hole?) of Transfer Pricing

According to Wilkie and Eden, there are three underlying reasons for the current lack of confidence in the international rules for taxing the global profits of multinational enterprises (MNEs), to wit: (1) tax rules are not universal or natural; (2) taxes must be practical, administrable, and collectible; and (3) tax policy is a domain where national sovereignty and multilateralism are both important and conflictual. The authors use Transfer Pricing as a case study because it affects how an MNEs global profits are allocated among countries. Wilkie and Eden then make proposals for an alternative to the arm’s length principle with inspiration from the distinction made by the International Centre for Settlement of Investment Disputes between investment and trade that underlies the four-factor Salini test: contribution, assets, risk, and duration. They argue that the Salini test provides useful insights into the conundrum of “source” and a way out of the current lack of confidence in the international tax system.

Click here to read. Link required.