This update provides a snapshot of the publications and social media activities of the South Centre during the month of August 2018.
Interaction of Transfer Pricing & Profit Attribution: Conceptual and Policy Issues for Developing Countries
Till 2010, model tax conventions treated profit attribution to permanent establishments and transfer pricing under different articles, and profit attribution under Article 7 allowed sales to be taken into account both in the direct accounting method as well as the indirect apportionment method. However, the revised Article 7 in the 2010 update of the OECD Convention approximated profit attribution with transfer pricing and omitted the option of apportionment, thereby undermining sales and contributions made by market jurisdiction to business profits. When a tax treaty retains Article 7 based on the UN Convention or the earlier OECD Convention, Contracting States can take sales into account and also opt for apportionment. Developing countries need to fully understand these implications of Article 7 in their tax treaties, and opt for informed choices for transfer pricing and profit attribution to permanent establishments, including apportionment that takes sales into account.
Transfer Pricing: Concepts and Practices of the ‘Sixth Method’ in Transfer Pricing
Many developing countries are particularly concerned with problems of transfer pricing in the extractive industries, which are often significant components of their economies. Similar to other sectors, profit attribution may be highly dependent on the valuation of commodity exports. For this reason, a number of developing countries have adopted the ‘Sixth Method’, following the Argentine experience. This method aims to establish a clear and easily administered benchmark and avoid the need for subjective judgment and discretion.