Transfer Pricing OECD Anti-Abuse Rules on Intangibles Clash with Economics of Contracts. At Arm's Length, Who Has the Right to Intangibles’ Revenues When the Funder (Cash Box) of the Development Lacks Capability to Monitor the Developer's Activity?

International Tax Journal by Wolters Kluwer issue November/December 2017

Posted: 15 Sep 2017 Last revised: 10 Jul 2018

See all articles by Andrea Musselli

Andrea Musselli

Studio Musselli - Economic, Tax and Legal Advisors

Date Written: September 11, 2017

Abstract

OECD Transfer Pricing Guidelines (TPG), after 2015 BEPS documents, enforce the rule according to which the intangible funder is not allowed to gain intangibles’ revenues when lacking ability to control the project development performed by other group companies.

OECD rule has a primary anti-abuse target against highly capitalized companies (cash boxes) which reside in low Tax Countries and have no other activity than funding an intangible development, so assuming the role of residual claimant of group revenues.

Despite what OECD affirms, we prove with support of Economics of contracts and analysis of three main Principal-Agent models, that the OECD rule is contrary to conditions that independent parties would agree upon in similar circumstances (the arm’s length principle).

In fact when the intangible’s funder lacks the ability to monitor the performance of the intangible’s developer, the arm’s length contract must provide a developer’s incentivizing variable remuneration which aligns both the funder’s and the developer’s interests, but the funder remains residual claimant of revenues. This scenario clashes with OECD rule.

To summarize, the 2015 BEPS rules solve the problem of possible and perceived abuses through “cash boxes” but at the high price of radically altering the Arm’s Length Principle (ALP), that no longer mimics what independent parties would agree upon in similar circumstances.

Our proposition is regardless the issue, that we accept, that the company funding the intangible project must have a “level” of substance such to be not considered a “pure cash box” that is , it must exercise the capability to oversee risks managed by another; clear rules setting the said threshold are necessary.

Keywords: Contract Theory, Principal Agent model, Transfer pricing, arm's length, OECD, BEPS, intangible

JEL Classification: D86, K34

Suggested Citation

Musselli, Andrea, Transfer Pricing OECD Anti-Abuse Rules on Intangibles Clash with Economics of Contracts. At Arm's Length, Who Has the Right to Intangibles’ Revenues When the Funder (Cash Box) of the Development Lacks Capability to Monitor the Developer's Activity? (September 11, 2017). International Tax Journal by Wolters Kluwer issue November/December 2017 , Available at SSRN: https://ssrn.com/abstract=3035218

Andrea Musselli (Contact Author)

Studio Musselli - Economic, Tax and Legal Advisors ( email )

Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
638
PlumX Metrics