What is the UN tax committee for, anyway?

In January, the UN tax committee sent out a call for submissions [pdf] to the update of its transfer pricing manual. The subgroup working on this update will be drafting additional chapters on intra-group services, management fees and intangibles, all topics that greatly interest developing countries and civil society organisations grouped around initiatives such as the BEPS monitoring group.

So who made submissions to the UN consultation? Four private sector organisations, two academics, the World Bank and the Chinese government. Not a single NGO. Meanwhile, considerable effort has been expended by civil society groups in drafting submissions to and reports about the OECD’s BEPS process, lamenting how issues of concern to developing countries are likely to be left by the wayside.

I think this is a pretty strange prioritisation. Why focus all your energies on a process that you suspect is not going to deliver results for developing countries, and ignore entirely a process with a specific mandate to do so? I debated this a bit on twitter earlier this week with, among others Alex Cobham of the Centre for Global Development, who told me he considered it “self-evident that BEPS is relevant to developing countries’ tax base in a way that UN Transfer Pricing Manual may not be.” (We were also discussing automatic information exchange, which I’ve discussed before).

I don’t agree with Alex on the detail. But let’s consider this from first principles. How do (or should) NGOs prioritise their campaigning resources? I suppose the equation is something like:

Importance = 1. Magnitude of potential impact x 2. Likelihood of success + 3. Effect on long term balance of power

In the short-to-medium term it’s important to take into account both the size of what is at stake and the capacity of civil society groups to influence it. But there’s a long term dynamic too that means it may be strategic (unstrategic) to work on something that is unlikely (likely) to succeed in itself but will contribute towards (undermine) a long term strategy.

When I ask them, NGO folks often suggest that they don’t want to prioritise the UN because it scores low on all three counts. That is:

  1. It’s just a talking shop, without the same influence as the OECD
  2. In any event, the UN’s track record shows that the OECD countries have got all the decisions sewn up
  3. And in the long term the UN would be too unwieldy and bureaucratic a forum to be a viable home for international tax politics

I’m going to try to explain why I think this calculation is wrong.

1. It’s just a talking shop, without the same influence as the OECD

Both the OECD and the UN are soft law bodies when it comes to tax treaties and transfer pricing. They set standards in the form of model treaties and guidelines, but these have no binding effect on countries unless they choose to use them in treaty negotiations and in their domestic transfer pricing rules. This applies to the outcomes of OECD deliberations just as much to those of the UN. (Nothwithstanding the OECD’s proposal for a mutlilateral convention to implement the treaty aspects of BEPS, which will presumably be offered as a fait accompli to developing countries, including negative as well as positive aspects for them).

To influence the distribution of the international tax base, then, you need to influence bilateral treaty negotiations and national lawmaking. When it comes to treaty negotiations, at the level of standard-setting you can do two things: influence the developed country position (the OECD model) and influence the developing country position (the UN and regional models). The former will be harder, but will it have a bigger potential impact than the latter?

As I mentioned in my post a couple of weeks ago, a recent IBFD study shows that, where the model treaties diverge, the OECD model seems to be used more often than the UN model, which seems like a logical outcome of differentials in negotiating strength. So before even looking at how the model treaties might be changed, the best outcome for developing countries is surely to increase the prevalence of UN model provisions in negotiated treaties. In any event, the UN model is by no means ignored. Some of its most distinctive provisions, such as the services permanent establishment and source state taxation of royalties, have been adopted quite widely..

Turning to transfer pricing, you might remember that the first edition of the transfer pricing manual created some waves. This was mainly because of its inclusion of a annex on the ‘country practices’ of China, Brazil, India and South Africa, which emphasised their points of dissatisfaction with the OECD’s predominant transfer pricing guidelines. It is perhaps too early to see how influential the UN manual will be.

Accept for a moment the view, propounded by NGOs and sketched out in Chapter 10 of the UN manual, that OECD transfer pricing rules deprive developing countries of tax revenue because of enforcement troubles and an inherent bias towards countries that can capture the intangibles and high-value services. In that case an official document written by government officials discussing these issues and articulating alternatives is clearly very useful. Some people have suggested to me that the authors of Chapter 10 might be using it mainly as a tool to influence the OECD, but on the other hand there’s definite interest in its content from developing countries. South Africa indicates in its contribution that it is considering some aspects of the Indian and Chinese approaches.

2. In any event, the UN’s track record shows that the OECD countries have got all the decisions sewn up

I realised last October that although OECD members are in a minority on the UN committee, once you include the G20 members who are full partners in the BEPS process, the figure rises to 16 out of 25. And many of the individuals in key positions on the UN committee are the same people who represent their countries in the relevant OECD committees. So it would appear that for the UN to articulate any kind of alternative to the OECD, some of these people would need to set aside narrow national interest. Cynics feel that this is unlikely.

And yet the UN is doing alright. In the face of stiff opposition from a number of developed countries and the private sector, it’s ploughing ahead with a new article in its model treaty giving source countries the right to tax technical service fees. Developing countries often want such an article included when they negotiate, and they’re more likely to get it if it’s in the UN model.

I noted above that the UN’s transfer pricing manual is quite critical of the OECD approach, if only in its annex. Early plans for the manual proper had included greater divergence from the OECD approach, including discussion of fixed margins and formulary apportionment. During the drafting process these points were largely eliminated or relegated to the aforementioned annex.

If NGOs feel let down by what they see as the timidity of the UN committee, they might do well to study how their own (lack of) engagement in processes like this contributes to the outcomes in which they express disappointment. Having sat in on several sessions of the committee, I’m in no doubt that when matters like this come up for debate they stand or fall on the strength of feeling among the committee’s members, who in turn listen to the views of lobby groups. Business groups certainly think so, as evidenced by their submissions to the transfer pricing manual consultation.

If UN committee members were being lobbied at committee meetings, held to account in their home countries, and barraged with written submissions, all on the basis of a coordinated and specific agenda such as NGOs have developed for BEPS, the outcomes really would be different. That more confident exploration of unorthodox approaches proposed for the UN transfer pricing manual, for example, might well have made it into the final draft.

3. And in the long term the UN would be too unwieldy and bureaucratic a forum to be a viable home for international tax politics

I have less to say about this, because my experience of the UN is limited to the tax committee we have today. Most international relations theories accord power to international organisations in their own right, not just the sum of their members. An organisation’s power might come from its technical dominance, by exerting social pressure as monitoring reports from the OECD and IMF do, and through agenda setting, which is also a power that NGOs have. How much attention NGOs show towards an international organisation most certainly affects that organisation’s capacity to set the agenda, and its authority to speak about developing country issues.

It’s only one part of a bigger picture, of course, but nonetheless, development NGOs’ propensity to engage in media battles with Pascal Saint-Amans, and to attend OECD meetings in force, even if making critical comments, reinforces the idea that the OECD is where the action is for developing countries too. Of course the OECD can make technical reforms that help developing countries, but, since international tax is also about political settlements, I think it’s a strategic error to focus the overwhelming share of NGOs’ resources there at the expense of the UN.

Meet the new UN tax committee

The list is out, together with a provisional agenda.

The BRICS minus Russia all have people on the committee (remember they do not represent their countries in an official capacity), although with some changes in personnel. The UK’s Andrew Dawson returns. Some of the key personalities behind the committee’s work this past session – previous chair Armando Yaffar and transfer pricing subgroup coordinator Stig Sollund – stay on. It’s great to see Zambia joining the sub-Saharan contingent, as one of the countries whose government seems most engaged in tax and development. Ghana has also replaced its nominee with the head of its treaty negotiating team, which is a shrewd move, while Azerbaijan’s top negotiator Ulvi Yusifov joins the committee after having attended pretty much every session for the past decade.

We’ll get more of a feel for the committee’s dynamics once we see who is elected as chair, and if and how the provisional work agenda is changed. Two flashpoints between OECD and non-OECD countries are likely to be the previous committee’s proposal to add a new article to the model treaty on taxation of services, and the plan to begin an update of the transfer pricing manual so soon after it was published.

Me though, I’m most looking forward to agenda item 6(a)(ii)b, “Whether a satellite in geostationary orbit could constitute a permanent establishment.”

The full committee membership is:

Mr. Khalid Abdulrahman Almuftah (Qatar)
Mr. Mohammed Amine Baina (Morocco)
Ms. Bernadette May Evelyn Butler (Bahamas)
Mr. Andrew Dawson (United Kingdom of Great Britain and Northern Ireland)
Mr. El Hadji Ibrahima Diop (Senegal)
Mr. Johan Cornelius de la Rey (South Africa)
Ms. Noor Azian Abdul Hamid (Malaysia)
Ms. Liselott Kana (Chile)
Mr. Toshiyuki Kemmochi (Japan)
Mr. Cezary Krysiak (Poland)
Mr. Armando Lara Yaffar (Mexico)
Mr. Wolfgang Karl Albert Lasars (Germany)
Mr. Tizhong Liao (China)
Mr. Henry John Louie (United States of America)
Mr. Enrico Martino (Italy)
Mr. Eric Nii Yarboi Mensah (Ghana)
Mr. Ignatius Kawaza Mvula (Zambia)
Ms. Carmel Peters (New Zealand)
Mr. Jorge Antonio Deher Rachid (Brazil)
Mr. Satit Rungkasiri (Thailand)
Ms. Pragya S. Saksena (India)
Mr. Christoph Schelling (Switzerland)
Mr. Stig B. Sollund (Norway)
Ms. Ingela Willfors (Sweden)
Mr. Ulvi Yusifov (Azerbaijan)

UN transfer pricing manual: what Brazil, India and China do differently

‘Country Practices’. The title of Chapter 10 of the new United Nations Practical Manual on Transfer Pricing [pdf] doesn’t exactly set the pulse racing. But as I noted in my blog on the manual as a whole, this document is politically very significant.

It’s probably the only detailed description of Brazil, China, India and South Africa’s approach to transfer pricing, both how they follow and how they differ from the OECD methods. Significantly, these contributions are expressed not just in terms of the legal and administrative realities, but also the policy objectives underlying them. Chapter 10 functions as a comprehensive critique of the OECD guidelines – almost a manifesto – endorsed and in most cases written by tax officials from some of the world’s most powerful economies.

So what’s in it? Here are some digested highlights – but you should read it all.

Brazil: fixed margins

Since the mid 1990s, Brazil has been the world’s transfer pricing maverick. It makes no claim to follow the OECD guidelines, although the core of its approach is analogous to some of the methods outlined in those guidelines. Brazil views its approach as consistent with the arm’s length approach, since it’s another way to approximate the price that would be paid between companies trading at arm’s length. Many others disagree with this view.

Under the OECD approach, the taxpayer (and tax authority, if it is challenging a taxpayer) needs to identify a ‘comparable’ company or transaction for each and every transfer price under assessment, subject to some adjustments. The simplest method is to find two independent companies that are trading a similar good or service, and use that price. Brazil adopts this method too.

If that can’t be done, some other OECD methods (Cost Plus and Resale Minus) use comparable profit margins, applying them to the price paid when the good or service under consideration is eventually bought from or sold to a third party. (There are other OECD methods that are even more complicated, but they’re not used in any form by Brazil). The Brazilian approach uses the same idea, but prescribes fixed profit margins.

In a simple example, imagine a Canadian mining company operating in Brazil. There are two subsidiaries, a mine in Brazil, and then an intermediary in Bermuda that buys the minerals and sells them on to third parties. To apply the OECD’s Resale Minus approach, you’d find a comparable commodity trader that buys minerals from third parties and sells them on to other third parties. You’d look at the profit margin it makes, then apply that same profit margin to the actual price at which the minerals from Brazil were sold on by the Bermudan company to a third party, to obtain the price at which the Bermudan company bought the minerals from its sister company in Brazil.

Brazil’s Resale Price Method is similar, except that rather than looking for a comparable, you apply a fixed margin of (usually) 20% to the actual price at which the minerals were sold on to third parties. In other words, the transfer price from Brazil to Bermuda would be 80% of the resale price from Bermuda to a third party. Last year Brazil made its method a bit more fine-grained, by setting out different margins for different sectors, based on data about each sector.

The Brazilian section of Chapter 10 argues that this method is easier to apply and provides more certainty than the OECD approach. It acknowledges that the approach may create double taxation because it’s not compatible with other countries that use the OECD methods, and that, “it is unavoidable that some Brazilian enterprises will be taxed at (higher or lower) profit margins not compatible with their profitability.”

China, India and South Africa

“As a developing country, China faces a number of difficult challenges, to many of which ready answers have not been found from the OECD guidelines,” notes the Chinese section of Chapter 10, written by two senior tax officials. South Africa’s submission concurs:

Whilst the OECD Guidelines have been particularly useful in providing a conceptual understanding of what is the nature of the arm’s length principle, there are instances when the Guidelines fail to address the more practical aspects of how to apply the principle

According to all three of these countries, the difficulty is with how to implement the arm’s length principle. And their sections of the manual set out many practical problems with implementation. But I think that there’s something more than that at stake here. These countries (or at least India and China) want to claw back a larger share of the tax base, which is about changing the apportionment between themselves and other countries. They may argue that their position is a more accurate implementation of the arm’s length principle, but to do so is to understate what they’re trying to achieve. Below are three examples.

Location specific advantages

The premise of the Location Specific Advantage (LSA) approach is that investments by multinational companies in these countries are more profitable than those in other countries, as a result of LSAs such as a cheap, comparatively skilled labour force, a large, relatively untapped consumer market, and more lax environmental legislation. This needs to be take into account when identifying and using comparables that do not have these same advantages.

To determine the transfer price by reference to a comparable transaction or company in another country, “China takes the view that there may be instances where the differences in geographical markets are so material that it warrants comparability adjustments to bridge the differences.” In other words, China revises up the profit made by Chinese subsidiaries, and hence the tax charge, when comparing them to other countries, because it thinks the LSAs it offers make investments in China more profitable than those in other countries.

South Africa says it shares this concern:

There are many instances where unique dynamics exist within the South African market enabling South African subsidiaries to realise higher profits than their related party counterparts in other parts of the world, or than are evidenced by comparable data obtained from foreign databases…Building on the practice followed in India and China, the SARS is currently considering its approach to location savings, location specific advantages and market premiums etc. within certain industries and such factors will be addressed when conducting audits.

The Indian section also discusses location specific advantages. Its argument, however, relates to whether local comparables, as well as foreign ones, are valid. Although the chapter doesn’t say this, I think India’s argument is also that the arm’s length principle doesn’t work here, because there is no arm’s length scenario that captures the location specific advantages:

Hypothetically, if an unrelated third party had to compensate another party to the transaction in a low-cost jurisdiction by an amount that was equal to the cost savings and location rents attributable to the location, there would be no incentive for the unrelated third party to relocate business to a low-cost jurisdiction.

What makes the LSA concept interesting is not merely that these countries are laying claim to a larger share of MNCs’ tax base than the OECD guidelines attribute to it. They are saying, quite explicitly in China’s case, that under free market (“arm’s length”) conditions, they don’t receive a fair share of the profits from inward investment, because the LSAs aren’t fairly priced by the market. China is using the tax system to correct for what it sees as unfair conditions in the global economy.

Below is a presentation by another Chinese official at a Tax Justice Network conference last year. Scroll through to slide 20 for the part on LSAs.

Intangibles

Transfer pricing is supposed to start from a ‘functional analysis’ that takes into account functions, assets and risks to determine how profit should be allocated. But intangible assets (and risks, see below) can be more easily moved than functions and tangible assets. China and India are concerned that multinationals tend to characterise subsidiaries in their economies as exploiting foreign-owned intellectual property, on which they must pay royalties, in order to deflate the profits made there.

For example, China takes the view that the value of a marketing intangible (such as a brand name) is inextricably linked to the market in which it is sold. In a memorable example, Head & Shoulders is a popular shampoo in China, and a foreign brand. But when it first arrived on the Chinese market, most consumers didn’t know what the words “Head and Shoulders” meant. “Over time,” says the manual, “the local Chinese affiliates acquire the skill and experience from operations in China, and may even contribute to the improvement of the MNE’s original intangibles. The issue in this scenario is whether the local Chinese affiliates should be entitled to additional profit, and if so, what is the appropriate method to calculate the additional profit?”

The Indian approach is similar:

Indian subsidiaries/related parties (which are claimed as no risk and limited risk bearing distributors by the parent MNE in order to justify low cost plus return) have incurred and borne huge expenditure on development of marketing intangibles. These entities generally incur very large losses or disclose very nominal profit as evident from their return of income

Instead of a flow of royalty payments out of India, it argues, the parent company should be reimbursing its Indian subsidiary for the local marketing intangibles created, without which it couldn’t sell into India.

Risks, and the formulary apportionment bombshell

India is concerned that the OECD approach overvalues the role of risks in allocating profits. Risk plays an important role in the functional analysis that underpins transfer pricing, because the higher the risk taken by one part of a company, the higher the transfer price it can charge. The Indian section says risks are “a by-product of [a company’s] performance of functions and ownership and the exploitation or use of assets employed over a period of time.” It “does not agree with the notion that risk can be controlled remotely by the parent company” and says that if “important strategic decisions” are taken in India then “the allocation of risk to the parent MNE is not only questionable but is devoid of logical conclusion.” Ouch.

The Chinese section concurs, arguing that “a risk‐based approach may place insufficient regard for the fact that there are sizeable assets located in China (i.e. the work force and factory plants).” It goes as far as to conclude that, in the case of the electrical manufacturing sector, “In this case, the assets and the people should largely dictate where the group’s profits should stay, and a global formulary approach should be a realistic and appropriate option.”

This is quite a bombshell. The chapter effectively argues that, in order to reduce the distorting effect of risks and intangible assets in transfer pricing, there is a case for the limited use of the formulary system advocated by Tax Justice Network, distributing the profits based on only on the assets and people in each jurisdiction. Wow. That will no doubt get tax justice activists excited, but to me what’s more interesting is the open discussion about which factors to take into account in allocating profits, and which to disregard. That’s not just about refinements to the technical implementation of the arm’s length principle: it’s politics.

The United Nations Practical Manual on Transfer Pricing: a bluffer’s guide

Logo of the United Nations

Logo of the United Nations (Photo credit: Wikipedia)

Last week saw the official launch of a 495-page document by the United Nations tax committee, its new Practical Manual on Transfer Pricing for Developing Countries [pdf]. The final product has been four years in the making and is an impressive, introductory-level guide to transfer pricing. So definitely worth dipping in and out of if you’ve never quite got your head round exactly how international rules divide up the tax base of a multinational company.

Because of its length, few people outside those who follow the UN committee in depth have really understood what the manual is about, and its implications for the international politics of taxation. So here’s a crib sheet on some of its more controversial aspects.

1. The manual is hardly the product of a group of tax mavericks

The subgroup responsible for drafting the manual includes two members of the OECD’s Working Party 6, the technical group responsible for its transfer pricing guidelines – indeed the subgroup’s Norwegian chair is also a bureau member of WP6 – as well as the head of the transfer pricing unit of the OECD secretariat. The subgroup had several private sector representatives, including people from Ernst & Young and Baker & Mackenzie, who did large amounts of drafting, and Shell’s global transfer pricing manager.

This was balanced by government and private sector representatives from developing countries (many of whose countries also have the status of observing participants over at WP6). I understand that there were some quite heated exchanges at times, and the group certainly did include some considerations unlikely to have been given much airtime at the OECD.

2. The main body of the manual is consistent with the OECD guidelines

To set the context, we need to understand the UN committee’s position on the OECD transfer pricing guidelines. The 2001 edition of the UN model convention explicitly endorsed the arm’s length principle, and recommended that countries implement it using the methods set out in the OECD guidelines:

the Contracting States will follow the OECD principles which are set out in the OECD Transfer Pricing Guidelines. These conclusions represent internationally agreed principles and the Group of Experts recommend[s] that the Guidelines should be followed for the application of the arm’s-length principle which underlies the article.

The Manual defines the arm’s length principle as, “an international standard that compares the transfer prices charged between related entities with the price of similar transactions carried out between independent entities at arm’s length.”

The 2012 update to the UN model convention also endorses the arm’s length principle, but it is more circumspect about the OECD guidelines. This is because in 2011, when the updated model convention was agreed, the Brazilian, Indian and Chinese committee members recorded a reservation to the paragraph of the 2001 model quoted above. (The model conventions are the views of the individual members of the committee at the time they are agreed). Rather than attempting to find a consensus statement for the new model convention, the committee agreed to quote what their predecessors had said in 2001, and then add the following text:

The views expressed by the former Group of Experts have not yet been considered fully by the Committee of Experts, as indicated in the records of its annual sessions.

So we can see that the UN committee’s position on the role of the OECD’s transfer pricing guidelines has changed over the course of this session (though it continues to endorse the arm’s length principle). Depending on how this evolution continues under the new committee membership, future versions of the transfer pricing manual might have the scope to carve out a more distinctive methodology for developing countries. But that was ruled out early on for this manual. The subcommittee concluded, as its chair reported back to the full committee in 2010, that its mandate required that the Manual maintain “consistency” with the OECD guidelines, which the UN model at that time – the old version – recommended that countries follow.

3. Consistent, but not identical

The transfer pricing subcommittee’s mandate, from 2009, embodies the balancing act that anyone working on transfer pricing in developing countries faced. The subcommittee must ensure:

a) That it reflects the operation of Article 9 of the United Nations Model Convention, and the Arms Length Principle embodied in it, and is consistent with relevant Commentaries of the U.N. Model.

b) That it reflects the realities for developing countries, at their relevant stages of capacity development.

c) That special attention should be paid to the experience of other developing countries.

An earlier proposed outline for the manual had included among subheadings on transfer pricing methods ‘current’ and ‘alternatives’. Under the latter, a single bullet point says. “Global Formulary Apportionment – an introduction (alternative method for applying the ALS or alternative to the ALS?).” This was effectively ruled out by the mandate, but there was still a question about how to balance “consistency” with the OECD guidelines on the one hand with “reflecting the realities for developing countries” on the other.

The UN committee continued to discuss ‘simplifications’ to the methods included in the OECD’s transfer pricing guidelines. For example, in 2010:

The discussions of the group of experts, however, included an exchange of views at some length regarding the use of presumptive arm’s length margins, safe harbours and formulas when applying arm’s length pricing profit methods….[Monique van Herksen of Ernst & Young] explained the potential benefit to developing country tax administrations in making use of presumptive margins and safe harbours in relevant circumstances. Additionally, she mentioned as an idea to be considered that the United Nations, in an appropriate form, might issue temporary industry margins based on research and statistics to be used by taxpayers and tax administrations as arm’s length presumptive benchmarks.

The final manual outlines these kinds of simplifications (although not van Herksen’s final proposal quoted above) but it doesn’t propose them as alternatives to the OECD guidelines – instead it notes that the latter are currently being updated to endorse the use of safe harbours. In the future, as both the OECD and UN consider how developing countries can simplify the implementation of the arm’s length principle, it will be interesting to watch the interplay between their respective documents.

4. The manual sets out the contours of current transfer pricing debates, and business is not happy

As I blogged at the time, the US Council for International Business wrote a rather angry letter [pdf] to the committee ahead of its final discussion of the manual last year. One section that it was unhappy about was 9.4.2, which according to USCIB, “ought to be deleted in its entirety. In our view, the only purpose of this section is to undercut the value of the OECD [transfer pricing guidelines] as the global standard in the area of transfer pricing.”

That section is still in the final version, and it still notes that, “the interpretation provided by the OECD Transfer Pricing Guidelines may not be fully consistent with the policy positions of all developing countries.” It is summed up as follows:

developing countries may wish to consider the relevance of the OECD Transfer Pricing Guidelines, along with the growing body of UN guidance and other available sources, when establishing their own domestic and cross-border policies on transfer pricing.

It’s hard to view this as a dramatic policy statement by the Committee. Rather, it’s an accurate description of the current state of affairs, and the concluding recommendation is made in the context of dispute avoidance, for which developing countries need to consider the actual practices of countries with which they may get into a dispute.

5. Chapter 10 is probably the manual’s biggest contribution

During 2011, as the manual developed, its outline started to include a chapter 6, on ‘The [Possible] Use of Fixed Margins’, otherwise known as ‘the Brazil chapter’. Although it existed in draft form, this chapter – a description of the Brazilian approach to transfer pricing, which is not consistent with the OECD guidelines – was never published on the UN website. By 2012, it had disappeared from the manual, replaced instead by a chapter 10, which unlike the rest of the manual “does not reflect a consistent or consensus view of the Subcommittee.”

I’ve heard that the proposed ‘Brazilian chapter’ was the subject of a lot of controversy, as well as variously that it was opposed by OECD members, lobbied against by the OECD secretariat, and even fought by other large developing countries, who didn’t see why Brazil should get a chapter all of its own. Certainly it seems inconsistent with the way the subgroup interpreted its mandate (see 2 above).

Whoever opposed the Brazilian chapter may instead have created a monster in chapter 10. It’s probably the only detailed description of Brazil, China, India and South Africa’s approach to transfer pricing, both how they follow and how they differ from the OECD methods. Significantly, these contributions are expressed not just in terms of the legal and administrative realities, but also the policy objectives underlying them.

It seems unlikely that smaller developing countries will read this chapter and try to adopt the methodologies it outlines. Rather, chapter 10 functions as a comprehensive critique of the OECD guidelines – almost a manifesto – endorsed and in most cases written by tax officials from some of the world’s most powerful economies. As a focal point in transfer pricing discussions, it is politically very significant.

The nature of this critique is the subject of a separate blog.

6. The political significance of the manual depends on what happens next

The UN manual contains a lot of very useful text that, on a technical level, will be very useful for developing countries. The current committee wants the manual to develop in the future, and it seems clear that the UN’s arrival on the transfer pricing scene is a fundamental change in international tax governance.

The UN Manual is not an alternative to the OECD Guidelines. Yet. It could evolve in that direction, creating a counterweight in the same mould as its model treaty, but that depends on what the new committee decides to do with it.

It also depends on two more things. First, on the unresolved discussion concerning the UN model convention’s position towards the OECD guidelines. Further work on the UN manual will inevitably be framed in terms of the model convention, which is the committee’s signature document, so the tension between OECD members and larger developing countries on this point is significant.

Second, it depends on the OECD, which has been working hard to reach out to developing countries [pdf]. Institutionally, it has brought many of them into its new Global Forum on Transfer Pricing, several are observers on its standards-setting committees, and there’s of course its Tax and Development Task Force. In terms of content, its project on transfer pricing ‘simplification’ has already incorporate some of the measures mentioned in the UN manual, and may even go further. So the OECD may succeed in creating a broad enough tent to regain its UN endorsement. It’s hard to see, though, how Chinese and Indian measures, which place them at odds with OECD countries, could be incorporated by the OECD itself.