Part Ⅰ Introduction 1
Chapter 1 The Subject, Definitions, Methodology, and Plan for the Book 3
1.1. The Subject 3
1.1.1. Transfer Pricing 3
1.1.2. The Arm’s Length Principle 6
1.1.3. Scope of the Subject 11
1.2. The Methodology and Material 13
1.3. Definitions and Terminology 16
1.3.1. General 16
1.3.2. Adjustments 16
1.3.2.1. Transfer Pricing Adjustment 16
1.3.2.2. Attribution of Income Adjustment 17
1.3.2.3. Transactional Adjustment 17
1.3.3. Transfer Pricing Adjustments 17
1.3.4. The Arm’s Length Test 18
1.3.5. Economies of Integration 19
1.4. The Plan for the Book 20
Part Ⅱ The Legal Basis for the Arm’s Length Principle 21
Chapter2 U.S.Tax Law 23
2.1. The Sources of Law in U.S.Tax Law 23
2.1.1. General 23
2.1.2. Legislation 24
2.1.3. Administrative Regulations 26
2.1.3.1. General 26
2.1.3.2. Regulations 26
2.1.3.3. Other Administrative Rules 28
2.1.4. The Court System 30
2.2.Historical Development 31
2.2.1. 1917-1960 Domestic Transactions 31
2.2.2. 1960-1968 Section 482 Regulations 33
2.2.3. 1966 Internationalization of the Section 482 Regulations 37
2.2.4. 1960-1986 Outbound Transactions 39
2.2.5. 1986 CWI Standard 42
2.2.6. 1988 White Paper 43
2.2.7. 1992-1994 Section 482 Regulations 44
2.2.8. 1982-2005 Inbound Transactions 46
2.2.9. 2000-2009 Outbound Transactions 51
2.3.Section 482 54
2.3.1. General 54
2.3.2. The Purpose of Section 482 54
2.3.3. Application of Section 482 55
2.3.3.1. Law 55
2.3.3.2. Facts 56
2.3.3.2.1. Information 56
2.3.3.2.2. Burden of Proof 57
2.3.3.3. Subsumption 61
2.3.4 Legal Conditions of Section 482 63
2.3.4.1. Taxpayers 63
2.3.4.2. Control 65
2.3.4.3. Transactions 67
2.3.4.4. Allocation norm 68
2.3.4.5. Causality 70
2.3.5. Legal Consequences of Section 482 70
2.3.5.1. Primary Adjustment 70
2.3.5.2. Corresponding Adjustment 72
2.3.5.3. Secondary Adjustment 72
2.4. Tax Treaties 73
2.4.1. General 73
2.4.2. Historical Development 75
2.4.3. U.S.Model Tax Convention 79
2.4.3.1. General 79
2.4.3.2. Article 9 80
Chapter 3 The OECD 83
3.1. Introduction to the OECD 83
3.2. Historical Development 84
3.2.1. The League of Nations 84
3.2.1.1. Introduction 85
3.2.1.2. 1921-1927, 1927 Draft Model 85
3.2.1.3. 1928-1929, 1928 Model 87
3.2.1.4. 1930-1933, The Carroll Report 89
3.2.1.5. 1933-1939, 1933 and 1935 Models 92
3.2.1.6. 1939-1946, 1943 and 1946 Models 94
3.2.2. OECD 95
3.2.2.1. 1956-1963, 1963 Model 96
3.2.2.2. 1963-1976, 1976 Guidelines for Multinational Enterprises 98
3.2.2.3. 1977, 1977 Model 99
3.2.2.4. 1974-1979, 1979 OECD Report 100
3.2.2.5. 1980-1984, 1984 OECD Report 101
3.2.2.6. 1984-1986, Unitary Taxation 102
3.2.2.7. 1987, 1987 OECD Thin Capitalization 103
3.2.2.8. 1992, 1992 Model 103
3.2.2.9. 1992-1993, The Task Force Reports 104
3.2.2.10. 1992-1997, OECD Transfer Pricing Guidelines 105
3.2.2.11. 1997-2009 109
3.3. Article 9 of the OECD Model 111
3.3.1. General 111
3.3.2. Interpretation of Article 9 112
3.3.2.1. General 112
3.3.2.2. The Vienna Convention on the Law of Treaties 113
3.3.2.2.1. General 113
3.3.2.2.2. Primary Means of Interpretation 115
3.3.2.2.3. Supplementary Means of Interpretation 119
3.3.2.2.4. Multilingual Treaties 121
3.3.2.3. The OECD Commentaries 122
3.3.2.3.1. General 122
3.3.2.3.2. Legal Status 123
3.3.2.3.3. Static or Dynamic Interpretation 128
3.3.2.4. Domestic Legislation 131
3.3.2.4.1. General 131
3.3.2.4.2 Autonomous or Domestic Law Interpretation 132
3.3.2.4.3. Domestic Law of the Source State or of the State Applying the Treaty 137
3.3.2.4.4. Domestic Tax Law or Other Law 141
3.3.2.4.5 Static or Dynamic Interpretation 141
3.3.2.5.Foreign Court Decisions 143
3.3.3. The Purpose of Article 9 145
3.3.3.1.General 146
3.3.3.2.Economic Double Taxation 148
3.3.3.3.Transfer Pricing Adjustments 149
3.3.3.4.Attribution of Income Adjustments 151
3.3.3.5.Transactional Adjustments 151
3.3.3.5.1. General 152
3.3.3.5.2. Thin Capitalization 161
3.3.3.5.3. CWI Standards 166
3.3.3.5.4. Business Restructurings 169
3.3.4. Relationship between Article 9 and other Articles of the OECD Model 177
3.3.4.1.General 177
3.3.4.2.Article 10 and Article 21 183
3.3.4.3.Article 11（6） and Article 12（4） 184
3.3.5. Relationship between Article 9（1） and Domestic Tax Law 190
3.3.5.1.Does Article 9（1） Broaden the Right to Tax under Domestic Law? 190
3.3.5.2.Does Article 9（1） Restrict the Right to Tax under Domestic Law? 193
3.3.5.2.1. General 193
3.3.5.2.2. Allocation Norm 195
3.3.5.2.3. Personal Scope 199
3.3.6. Legal Conditions of Article 9（1） 203
3.3.6.1.Subjective Scope 203
3.3.6.1.1. General 203
3.3.6.1.2. Enterprise 203
3.3.6.1.3. Resident 205
3.3.6.2.Control 213
3.3.6.2.1. General 213
3.3.6.2.2. Autonomous or Domestic Law Interpretation 213
3.3.6.2.3. Control Requirement 215
3.3.6.2.4. Concept of Control 216
3.3.6.2.5. Direct/Indirect and Vertical/Horizontal Relations 221
3.3.6.3. Objective Scope 222
3.3.6.3.1. General 222
3.3.6.3.2. Unilateral and Bilateral Transactions 226
3.3.6.3.3. Formal Requirements 227
3.3.6.3.4. Acts and Omissions 230
3.3.6.3.5. Direct/Indirect 233
3.3.6.4. Conditions 235
3.3.6.5. Allocation Norm 236
3.3.6.6. Income Reduction 237
3.3.6.7. Causality 239
3.3.7.Legal Consequences of Article 9 240
3.3.7.1. Primary Adjustment 240
3.3.7.2. Corresponding Adjustment 241
3.3.7.3. Secondary Adjustment 244
3.4. The OECD Transfer Pricing Guidelines 246
Chapter 4 Other International Law 249
4.1. United Nations 250
4.2. European Union 252
4.2.1. Primary Legislation 253
4.2.1.1.General 253
4.2.1.2.Fundamental Freedoms 253
4.2.1.2.1. General 253
4.2.1.2.2. Primary Adjustment 257
4.2.1.2.3. Corresponding Adjustment 272
4.2.1.2.4. Secondary Adjustment 275
4.2.1.3.State Aid 275
4.2.2. Secondary Legislation 276
4.2.3. Joint Transfer Pricing Forum 282
4.3.World Trade Organization 284
4.3.1. General 284
4.3.2. Arm’s Length Principle 284
4.4.Customary International Law 287
4.4.1. General 287
4.4.2. Arm’s Length Principle 288
Part Ⅲ The Concept of the Arm’s Length Principle 291
Chapter 5 Introduction 293
Chapter 6 U.S.Tax Law 295
6.1. General 295
6.2. Controlled Transaction 297
6.3. Reference Transaction 298
6.4. Valuation 302
Chapter 7 Discourse: German Tax Law 303
7.1. General 303
7.2. Controlled Transactions 307
7.3. Reference Transactions 307
7.4. Valuation 311
Chapter 8 Article 9（1） of the OECD Model 313
8.1. General 313
8.2. Controlled Transactions 313
8.3. Reference Transactions 314
8.4. Valuation 316
Part Ⅳ General Arm’s Length Rules 319
Chapter 9 Recognition of Controlled Transactions 321
9.1. U.S.Tax Law 321
9.1.1. General 321
9.1.2. Economies of Integration 326
9.1.3. Realistic Alternatives 329
9.2. The OECD Guidelines 332
9.2.1. General 332
9.2.2. Economies of Integration 334
9.2.3. Realistic Alternatives 341
Chapter 10 Aggregated and Separate Arm’s Length Tests 343
10.1. Aggregated Arm’s Length Tests 343
10.1.1. U.S.Tax Law 343
10.1.2. The OECD Guidelines 348
10.1.3. Discourse: German Tax Law 354
10.2. Separate Arm’s Length Tests 357
10.2.1. U.S.Tax Law 357
10.2.2. The OECD Guidelines 360
Chapter 11 Set-Off 365
11.1.U.S.Tax Law 366
11.2.The OECD Guidelines 367
Chapter 12 Multiple Year Analyses 375
12.1.U.S.Tax Law 375
12.1.1. General 375
12.1.2. Losses 377
12.1.3. Dynamic or Static Arm’s Length Tests 378
12.1.4. Prospective or Retrospective Arm’s Length Tests 379
12.2.The OECD Guidelines 379
12.2.1. General 379
12.2.2. Losses 382
12.2.3. Dynamic or Static Arm’s Length Tests 384
12.2.4. Prospective or Retrospective Arm’s Length Tests 388
Chapter 13 The Comparability Requirement 393
13.1.The Comparability Standard 393
13.1.1. U.S.Tax Law 393
13.1.2. The OECD Guidelines 396
13.2.Internal and External Reference Transactions 397
13.3.Comparability Factors 397
13.3.1. The Property or Services 398
13.3.2. The Functional Analysis 399
13.3.3. The Functions 400
13.3.4. Risks 403
13.3.4.1. General 403
13.3.4.2. Risk Allocation 407
13.3.4.2.1.U.S.Tax Law 407
13.3.4.2.2.The OECD Guidelines 411
13.3.5. Assets 417
13.3.6. Contractual Terms 418
13.3.6.1. General 418
13.3.6.2. Recognition of Contractual Terms 419
13.3.6.2.1.U.S.Tax Law 419
13.3.6.2.2.The OECD Guidelines 421
13.3.6.3. Volume 423
13.3.6.4. Long-term Contracts 426
13.3.7. Economic Circumstances 428
13.3.7.1. General 428
13.3.7.2. Geographic Market Differences 428
13.3.7.3. Location Savings 434
13.3.7.4. Market Form 438
13.3.7.5. Bargaining Position 440
13.3.8.Business Strategies 442
13.4. Irregular Transactions 446
Chapter 14 Legislative Restrictions 449
14.1. U.S.Tax Law 449
14.2. The OECD Guidelines 454
Chapter 15 Arm’s Length Range 459
15.1. U.S.Tax Law 459
15.2. Discourse: German Tax Law 462
15.3. The OECD Guidelines 472
Part Ⅴ The Special Arm’s Length Rules 475
Chapter 16 Services 477
16.1. General 477
16.2. The Definition of Services 478
16.2.1.General 478
16.2.1.1.U.S.Tax Law 478
16.2.1.2.The OECD Guidelines 479
16.2.2.The Activity Test 480
16.2.2.1.U.S.Tax Law 480
16.2.2.2.The OECD Guidelines 481
16.2.3.The Benefit Test 484
16.2.3.1.General 485
16.2.3.1.1.U.S.Tax Law 485
16.2.3.1.2.The OECD Guidelines 487
16.2.3.2.Shareholder Activities 488
16.2.3.2.1.U.S.Tax Law 488
16.2.3.2.2.The OECD Guidelines 495
16.2.3.3.Duplicative Activities 499
16.2.3.3.1. U.S.Tax Law 499
16.2.3.3.2.The OECD Guidelines 500
16.2.3.4.Indirect Benefit 501
16.2.3.4.1.U.S.Tax Law 501
16.2.3.4.2.The OECD Guidelines 502
16.2.3.5.Passive Association 503
16.2.3.5.1. U.S.Tax Law 503
16.2.3.5.2.The OECD Guidelines 506
16.3.Payment Form 509
16.3.1.U.S.Tax Law 509
16.3.1.1. Direct/Indirect Payment 509
16.3.1.2. Contingent Payment 512
16.3.2.The OECD Guidelines 514
16.3.2.1. Direct/Indirect Payment 514
16.3.2.2. Contingent Payment 521
16.4.Valuation 521
16.4.1.U.S.Tax Law 521
16.4.1.1. General 521
16.4.1.2. Arm’s Length Price or Cost-Only Price 524
16.4.2.The OECD Guidelines 527
16.4.2.1. General 527
16.4.2.2. Arm’s Length Price or Cost-Only Price 529
Chapter 17 Cost Sharing 537
17.1.General 537
17.2.The Relationship between the General Arm’s Length Rules and the Cost Sharing Rules 540
17.2.1. U.S.Tax Law 540
17.2.2. The OECD Guidelines 541
17.3.The Definition of Cost Sharing 542
17.3.1. U.S.Tax Law 542
17.3.2. The OECD Guidelines 545
17.4.The Participants 546
17.4.1. U.S.Tax Law 546
17.4.2. The OECD Guidelines 547
17.5.Cost Contributions 548
17.5.1. U.S.Tax Law 548
17.5.1.1. General 548
17.5.1.2. Costs 548
17.5.1.3. Methodology 551
17.5.2. The OECD Guidelines 552
17.5.2.1. General 552
17.5.2.2. Costs 552
17.5.2.3. Methodology 554
17.6.Buy-In Payments 555
17.6.1. U.S.Tax Law 555
17.6.1.1. General 555
17.6.1.2. PCT 557
17.6.1.2.1.General 557
17.6.1.2.2.Platform Contributions 558
17.6.1.2.3.Terms of a PCT 564
17.6.1.3.Supplementary Guidance on Transfer Pricing Methods 566
17.6.1.3.1.General 566
17.6.1.3.2.Discount Rates 568
17.6.1.3.3.Realistic Alternatives 570
17.6.1.3.4.Investor Model 572
17.6.1.4.Transfer Pricing Methods 576
17.6.1.4.1.General 576
17.6.1.4.2.Comparable Uncontrolled Transaction Method 576
17.6.1.4.3.Income Method 577
17.6.1.4.4.Acquisition Price Method 582
17.6.1.4.5.Market Capitalization Method 583
17.6.1.4.6.Residual Profit Split Method 584
17.6.1.4.7.Unspecified Methods 586
17.6.2. The OECD Guidelines 586
17.7.Changes in Participation 586
17.7.1. U.S.Tax Law 586
17.7.2. The OECD Guidelines 587
17.8.Adjustments 587
17.8.1. U.S.Tax Law 587
17.8.1.1. Transfer Pricing Adjustments 587
17.8.1.2. Transactional Adjustments 589
17.8.1.3. Periodic Adjustments 589
17.8.2. The OECD Guidelines 591
17.8.2.1. Transfer Pricing Adjustments 591
17.8.2.2. Transactional Adjustments 591
Chapter 18 Intangibles 593
18.1.General 593
18.2.Defition of Intangibles 596
18.2.1. General 596
18.2.2. U.S.Tax Law 596
18.2.2.1. General 596
18.2.2.2. Application of the Definition 601
18.2.3. Discourse: German Tax Law 610
18.2.4. The OECD Guidelines 615
18.2.4.1. General 615
18.2.4.2. Application of the Definition 619
18.3.Ownership of Intangibles 624
18.3.1. General 624
18.3.2. U.S.Tax Law 625
18.3.3. The OECD Guidelines 629
18.4.Joint Development of Intangibles 631
18.4.1. General 631
18.4.2. U.S.Tax Law 632
18.4.3. OECD Guidelines 641
18.5.Valuation 643
18.5.1. U.S.Tax Law 644
18.5.1.1.Special Arm’s Length Rules 644
18.5.1.2.Transfer Pricing Methods 645
18.5.1.2.1.Introduction 645
18.5.1.2.2.Comparable Uncontrolled Transaction Method 649
18.5.1.2.3.Comparable Profits Method 651
18.5.1.2.4.Profit Split Method 656
18.5.1.2.5.Unspecified Methods 658
18.5.2. Discourse: German Tax Law 662
18.5.3. The OECD Guidelines 666
18.5.3.1.Special Arm’s Length Rules 666
18.5.3.2.Transfer Pricing Methods 667
18.5.3.2.1. Specified Methods 667
18.5.3.2.2.Unspecified Methods 670
18.6.Periodic Adjustment 674
18.6.1. General 674
18.6.2. U.S.Tax Law 675
18.6.3. Discourse: German Tax Law 684
18.6.4. The OECD Guidelines 689
Part Ⅵ Transfer Pricing Methods 695
Chapter 19 General 697
19.1.Introduction to the Transfer Pricing Methods 697
19.2.Transfer Pricing Methods in Existing Law 701
19.2.1. U.S.Tax Law 701
19.2.2. The OECD Guidelines 701
19.3.Selection of Transfer Pricing Method 701
19.3.1. U.S.Tax Law 702
19.3.2. The OECD Guidelines 708
Chapter 20 Transfer Pricing Methods 713
20.1.Comparable Uncontrolled Price Method 713
20.1.1. Introduction 713
20.1.2. Comparability 714
20.1.3. Adjustments 715
20.1.4. Information 716
20.2.Resale Price Method 720
20.2.1. Introduction 720
20.2.2. Comparability 721
20.2.3. Adjustments 725
20.2.4. Information 726
20.3.Cost Plus Method 726
20.3.1. Introduction 726
20.3.2. Comparability 727
20.3.3. Adjustments 734
20.3.4. Information 735
20.4.CPM/TNMM 735
20.4.1. Introduction 735
20.4.2. Tested Party 739
20.4.3. Net Profits 739
20.4.4. Profit Level Indicators 740
20.4.4.1. Return on Operating Assets 741
20.4.4.2. Operating Margin 744
20.4.4.3. Berry Ratio 745
20.4.4.4. Net Profit Mark-Up 746
20.4.5. Comparability 747
20.4.6. Adjustments 748
20.4.6.1. Accounting Adjustments 749
20.4.6.2. Asset Intensity 749
20.4.7. Information 751
20.5.Profit Split Method 753
20.5.1. Introduction 753
20.5.2. Combined Net Profits 756
20.5.3. Allocation Methods 758
20.5.3.1. General 758
20.5.3.2. Residual Profit Split 759
20.5.3.3. Contribution Method 763
20.5.3.4. Comparable Profit Split 765
Part Ⅶ Conclusion 767
Chapter 21 Summary and Discussion 769
21.1. The Legal Basis for the Arm’s Length Principle 769
21.2. The Content of the Arm’s Length Principle 771
21.2.1.De lege lata 771
21.2.1.1. Controlled Transactions 772
21.2.1.2. Reference Transactions 773
21.2.1.3. Valuation 775
21.2.1.4. The Special Arm’s Length Rules 776
21.2.1.5. Summary 778
21.2.2.Problems de lege lata 778
21.2.2.1. Legally Oriented Problems 779
21.2.2.2. Economically Oriented Problems 780
21.2.2.2.1.Economies of Integration 781
21.2.2.2.2.Empirical Data 783
21.2.2.2.3.Quality of Functions 783
21.2.2.2.4.The Relativity of Arm’s Length Prices 784
21.2.2.2.5.Information Asymmetry 785
21.2.2.2.6.Tax Planning 786
21.2.3. De lege ferenda 787
21.2.3.1. General 787
21.2.3.2. Legally Oriented Problems 790
21.2.3.3. Economically Oriented Problems 793
Bibliography 799
Table of Cases 839
Table of Official Reports 853
Table of Statutes 861
Index 873