Arm’s Length Transaction Structures

Recognizing and restructuring controlled transactions in transfer pricing

Arm's Length
This book examines the authority to restructure and to disregard controlled transactions based on the arm's length principle. The book, thus, examines the outer limits of the adjustment authority granted by the arm's length principle as opposed to its core area of application (price adjustments).
Winner of the 2010 Mitchell B. Carroll Prize awarded by the International Fiscal Association (IFA) and the 2011 European Academic Tax Thesis Award awarded by the European Association of Tax Law Professors (EATLP) and the European Commission.

Why this book?

If associated enterprises make or impose special conditions in their controlled transactions which differ from those independent enterprises would have made, the arm’s length principle may authorize a profit adjustment. Such special conditions will not necessarily only be the price conditions, but may also include any other conditions. Hence, associated enterprises may not only value or price their transactions differently from independent enterprises, but may also structure them differently, and even enter into transactions independent enterprises would not contemplate undertaking at all.

The OECD has nevertheless recommended its Member countries as a general rule to adjust only price conditions and other valuation elements of controlled transactions based on the arm’s length principle. This general rule is sometimes referred to as the “as-structured principle”. The first main issue examined in this thesis is the obligation under the as-structured principle to recognize the controlled transaction actually undertaken by the associated enterprises as it has been structured by them.

The OECD, however, has identified two circumstances in which the arm’s length principle authorizes domestic tax administrations to restructure controlled transactions. These are (i) where the economic substance of the transaction differs from its form and (ii) where the transaction is commercially irrational and its structure practically impedes the determination of an appropriate transfer price. The second main issue examined in this thesis is the authority to restructure controlled transactions based on the arm’s length principle.

The common theme of the two main issues can be formulated as the question of how broad the authority is that the arm’s length principle grants to domestic tax administrations. This study, thus, examines the outer limits of the adjustment authority granted by the arm’s length principle.

Arm’s Length Transaction Structures examines these issues in the light of Article 9(1) of the OECD Model Tax Convention, as interpreted, in particular, by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The thesis also analyses relevant domestic law material, especially from Canada, Norway, and the United States, but also from, inter alia, Australia, Denmark, Germany, the Netherlands, Sweden and the United Kingdom.

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This book is part of the IBFD Doctoral Series

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Author(s)

Dr Andreas Bullen wrote this thesis as a Research Fellow at the Department of Public and International Law at the University of Oslo. He currently practices tax law with Wiersholm, Mellbye & Bech in Oslo.

Arm’s Length Transaction Structures
Chapter 1 Introduction
Chapter 2 Methodology
Chapter 3 Arm’s Length Provisions
Chapter 4 The As-Structured Principle: Introduction
Chapter 5 The As-Structured Principle’s Historical Development
Chapter 6 The As-Structured Principle’s Contemporary Expression
Chapter 7 The Restricted Adjustments: Introduction
Chapter 8 Examination of whether the As-Structured Principle Restricts Various Adjustments Not Based on the Arm’s Length Principle
Chapter 9 Which Adjustments under Art. 9(1) OECD MTC’s Arm’s Length Test Are Restricted by the As-Structured Principle?
Chapter 10 The Distinction between Structural Adjustments and Comparability Adjustments
Chapter 11 Structural Adjustments: Main Types and Techniques
Chapter 12 The As-Structured Principle’s Rationales
Chapter 13 The Subject Matter of the As-Structured Principle
Chapter 14 Principles Complementing the As-Structured Principle
Chapter 15 Preliminary Issues Common to Both Exceptions from the As-Structured Principle
Chapter 16 Common Issues Pertaining to Concrete Analyses under the Exceptions
Chapter 17 The Economic Substance Exception: General Scope
Chapter 18 The Economic Substance Exception: Categories of Arrangements Potentially Lacking Economic Substance
Chapter 19 The Commercial Rationality Exception: General Scope
Chapter 20 The Commercial Rationality Exception: Categories of Potentially Irrational Arrangements
Chapter 21 Irrational Transfers of Profit Generators
Chapter 22 Irrational Approaches to Valuation Uncertainty at the Time of Controlled Transactions
Chapter 23 Irrational Cost Incurrence: Qualitative Irrationality
Chapter 24 Irrational Cost Incurrence: Quantitative Irrationality
Chapter 25 Final Remarks
References
Other Titles in the IBFD Doctoral Series