This master’s thesis deals with the transfer pricing of intangibles and focuses on the U.S. standard commensurate with income. This standard has been accused of being incompatible with the overriding principle of transfer pricing, the arm’s length standard, and is not endorsed by the OECD. Recent developments on the topic include the introduction of a similar provision in Germany. The purpose is to evaluate the standard’s compatibility with the arm’s length standard and to establish the current position of the concept of commensurate with income. To meet this purpose the thesis first describes the inherent problems surrounding transfer pricing of intangibles as well as provides a background to transfer pricing in the U.S. The focus then shifts towards the history, application and criticism of the commensurate with income standard. The thesis also gives an account of the OECD’s and Germany’s positions on the matter. In the final analysis the compatibility with the arm’s length standard is examined from two angles; the commensurate with income standard’s valuation approach on one hand and its use of hindsight on the other. The commensurate with income standard uses an income approach to valuation of transfers of intangibles instead of the market approach recommended by the OECD. This may lead to overvaluation of intangibles and is not strictly in line with the arm’s length standard. The German commensurate with income provision is more in line with the market approach and is therefore more compatible with the arm’s length standard in this aspect. The commensurate with income standard allows adjustments to transfer prices with the benefit of hindsight. The actual income from a transferred intangible is thus used as evidence as to whether or not the original transfer price was set reasonably. The OECD is of the opinion that only information known at the time of the transfer should be used, but makes an exception for the particular situation when a tax authority can prove that unrelated parties would have adjusted transfer prices retroactively. The point made here is that the commensurate with income standard places the burden of proof on the taxpayer, while the OECD places it on the tax authority. This allows the OECD to stay true to the arm’s length standard, while the U.S. and Germany deviates somewhat from it. However, there is no exact manner in which to define the arm’s length standard, and even the OECD deviates from it more or less. The commensurate with income standard may be one step further away from the purest definition of it but not a complete deviation. The German version of commensurate with income manages to target the same problem while staying closer to the arm’s length standard. Germany has thereby found a middle way and might hold the solution to finding a consensus between the OECD and the U.S.

Business restructurings within multinational enterprises (MNEs) are regular occurrences. Such restructurings are often carried out in order to increase the MNE‟s competitiveness on the market by making the supply chain and management more efficient in order to ac-quire benefits due to economies of scale. There is a risk that such cross-border business re-structurings will transfer the profit/loss potential that is associated with the assets, risks and/or functions that are transferred, to low-tax jurisdictions in order to minimize the MNEs tax burden. Germany amended its tax act in order to prevent such profit potential from being transferred out of the country. This amendment came into effect on the 1st of January 2008. The OECD, which is the normative body on the international tax arena, re-leased a Discussion Draft for the public in September 2008 with the purpose to highlight the transfer pricing aspects of business restructurings and to serve as an interpretation of the application of the Transfer Pricing Guidelines on business restructurings. In this thesis, the concepts of profit/loss potential and indemnification, as they are pre-sented in the Discussion Draft, will be analyzed. The interpretation of the OECD will then be contrasted with the German and Swedish regulation of these concepts. The OECD defines a business restructuring as a transfer including a bundle of assets, risks and/or functions which are transferred across borders within a MNE. If this transfer in-volves the shift of profit/loss potential it shall be included in the valuation of the transfer price of the transactions. The profit/loss potential shall only be included if it can be identi-fied as belonging to a specific asset, risk or function of the bundle. In Swedish legislation there is only one rule which tax authorities can use in order to adjust the income of related parties. This regulation is not a specific rule for business restructurings as such but a gener-al rule for all transfer pricing matters. Sweden has traditionally followed the OECD guide-lines and the Swedish courts and tax authorities will most likely apply the guidance set out by the OECD on business restructurings as well. Germany views a business restructuring as a transfer package which consist of assets, risks and/or functions which are transferred a cross borders within a MNE. The concept of business opportunities, i.e. the profit potential of the combined assets, risks and/or func-tions of the transfer package, shall be included in the valuation of the transfer package. In the valuation of the transfer package synergy effects for the MNE and location savings as a whole shall be included. This concept deviates from the view of the OECD. The OECD states that only local synergy effects and location savings shall be included in the valuation of the transfer package. The German approach leads to an inherent risk of overvaluation of the transfer package. The way of valuing the transfer package in Germany could lead to taxation without realization, i.e. profits that would never have been or never could be rea-lized in Germany will be taxed. This contradicts the principle of realization. The OECD, in the Discussion Draft, gives an account for the possibilities for an indemni-fication for the transferor. A business restructuring can sometimes be compared with the breach of a contractual relationship. In such a situation, associated parties would be entitled to an indemnity if independent parties would be indemnified. Such an approach will be dif-ficult to apply in practice since indemnification is closely linked to nations national com-mercial legislation. The matter of indemnifying a party shall be decided on the merits of each case, and it can thereby be complicated to formulate a general regulation. The ques-tion regarding which authority shall be competent to govern such a matter must thereby al-so be resolved.

The purpose of this thesis is to analyse and compare the transfer pricing approaches held by the OECD, Germany and the United States when transferring an ongoing concern. The term “ongoing concern” in the OECD Transfer Pricing Guidelines is to be interpreted as very wide and to cover every case where a function is bundled with assets and risks. Even though there is no legal definition of the term , the definition of the OECD can still be said to represent the common definition of the term. When transferring an ongoing concern or a function the three approaches are all that it should be given a value that independent enterprises under similar circumstances would agree upon. Besides some particular cases, the OECD and German approach is that the function, assets and risks should be aggregated when determining the arm’s length price. The approach of United States is somewhat different, where an aggregation of the transactions is not always the case and goodwill and going concern value are not subject to the transfer pricing legislation. The comparability approaches and the transfer pricing methodologies of the three are is very similar, where some factors should be taken into account when determinign the comparability between two transactions and with the selection of the most appropriate transfer pricing method applied to the transaction. The comparable uncontrolled price method should be seen as a primary transfer pricing method, and if it is not possible to find comparable transactions or to make reasonable accurate adjustments the profit split method should be applied. The hypothetical arm´s length test is the method that would be applied in such case according to the German legislation. The selection of which valuation method to apply to the transfer depends on the facts and circumstances of the transfer.

The current United States tax code regarding foreign sourced income is outdated for a heavily globalized and interconnected world. Multinationals have played certain games with the tax code to lower their domestic and foreign tax bill. This form of tax avoidance has real economic effects that are leading to non-optimal economic outcomes. This paper will begin by offering examples of how multinationals are avoiding taxes, especially in the pricing of intangible assets. Other countries have adopted different ways to tax foreign profits; notably most countries either have a worldwide non-deferral tax system or a territorial tax system. There are costs and benefits associated with both systems of taxation that must be considered before adoption. Ultimately, this paper will conclude that a territorial tax system combined with an overhaul of the current rules regarding transfer pricing will lead to a better economic outcome than the current U.S. system of taxation.

Using a large sample of mergers and acquisitions from 27 countries over a 16-year period, I investigate how differences in tax and financial reporting policies affect the premium and structure of cross-border mergers and acquisitions. I find evidence that firms pay a premium to reduce the tax risk associated with strict transfer pricing rules. Further analysis segments acquisitions into those that are strictly financial versus those that are more strategic. Financial acquisitions are those where the acquirer is making the purchase for investment purposes rather than strategic reasons. These financial transactions generally lead to less integration between the two companies and therefore less inter-company transactions involving transfer pricing. Evidence based on this segmentation suggests that only differences in transfer pricing risk for non-financial acquisitions are priced. The results suggest that while on average non-financial acquirers will pay a higher premium to reduce transfer pricing risk regardless of industry, only those in highly scrutinized industries with high levels of intangibles, such as pharmaceuticals, will demand a discount for transactions which increase transfer pricing risk. In tests of acquisition structure, I find that shareholder-level capital gain taxes influence the structure of an acquisition. The influence of shareholder-level taxes is reduced by the presence of information asymmetry concerning the acquirer’s stock value. However, higher quality financial reporting reduces information asymmetry and improves the tax efficiency of acquisition structure providing tangible economic benefit to shareholders.

Using a large sample of mergers and acquisitions from 27 countries over a 16-year period, I investigate how differences in tax and financial reporting policies affect the premium and structure of cross-border mergers and acquisitions. I find evidence that firms pay a premium to reduce the tax risk associated with strict transfer pricing rules. Further analysis segments acquisitions into those that are strictly financial versus those that are more strategic. Financial acquisitions are those where the acquirer is making the purchase for investment purposes rather than strategic reasons. These financial transactions generally lead to less integration between the two companies and therefore less inter-company transactions involving transfer pricing. Evidence based on this segmentation suggests that only differences in transfer pricing risk for non-financial acquisitions are priced. The results suggest that while on average non-financial acquirers will pay a higher premium to reduce transfer pricing risk regardless of industry, only those in highly scrutinized industries with high levels of intangibles, such as pharmaceuticals, will demand a discount for transactions which increase transfer pricing risk. In tests of acquisition structure, I find that shareholder-level capital gain taxes influence the structure of an acquisition. The influence of shareholder-level taxes is reduced by the presence of information asymmetry concerning the acquirer’s stock value. However, higher quality financial reporting reduces information asymmetry and improves the tax efficiency of acquisition structure providing tangible economic benefit to shareholders.

In this thesis the definition of intangible property contained in the Transfer Pricing Guidelines is analysed with the aim of exploring whether it is satisfactory or not. Furthermore, the need to have a definition of intangible property for transfer pricing purposes at all is explored. To properly allocate income and expenditure relating to intangible property one needs to first establish who is the owner of the property. In the light of this the economic ownership is explored as well. Two countries, the United States and the United Kingdom, are chosen for a comparative analysis to see how their national legislation is designed and what advantages or disadvantages they might have. The Organisation for Economic Co-operation and Development has defined intangible property by giving examples of assets that shall be considered as intangible. As regards the ownership issue the guidance is scarce and questions such as what constitutes economic ownership and who will have a right in the future return of an intangible asset still remain. The United States and the United Kingdom, both members of the Organisation for Economic Co-operation and Development, have defined intangible property and handled the issue of ownership in two different ways. Ways that do not always coincide with the Transfer Pricing Guidelines. The conclusions of this thesis are mainly that the current definition of intangible property contained in the Transfer Pricing Guidelines is not satisfactory and that it needs to been changed. The author recommends that more focus is put on the third party's willingness to pay for the property in question. Although the definition is found to be unsatisfactory the author's conclusion is that a uniform definition of intangible property is necessary to achieve harmonisation and certainty. Furthermore the concept of economic ownership needs to be clarified.

Transfer pricing (TP) has for a long time been an important tax issue, however it is only within the past decade that it has gotten the attention it deserves. This since more and more corporations becomes globalized. When setting a TP within a multinational enterprise (MNE) it is important to consider the arm’s length principle. The reason for this is that all countries, involved in an internal transaction, are entitled to their fair share of tax revenues. The principle implies that when performing a transaction within a MNE, the price used shall be set on the same circumstances as if the transaction was performed between independent actors. Corporations which do not set their TPs in accordance with the arm’s length principle face the risk of adjustments and future audits. Setting a TP, which is in line with the arm’s length principle is, however, not an easy task, therefore the subject of advance pricing agreement (APA) has emerged. APA has existed since the middle of the 1980’s when it was first implemented in Japan. However, it was as recent as last year, 1st of January 2010, that a legislation concerning APA was implemented in Swedish tax legislation. The legislation implies that corporations which are a part of a MNE can apply for a binding agreement at the Swedish tax authority regarding future TP. This opportunity will provide for a foreseeable tax future. Due to this recent implementation of APA legislation in Sweden, we have chosen to conduct a cross-country analysis concerning regulations of APA, using countries which have had APA legislation for a substantial amount of time. The different countries which legislations we have studied in this thesis are Germany, the Netherlands, Sweden and the U.S. The purpose with this thesis is to examine if the Swedish legislation concerning APA will provide any advantages for Swedish MNEs. A qualitative research method with the focus on an abductive research approach has been used for this thesis. The abductive approach consists of both deductive and inductive research approaches. The deductive approach is used to answer our research questions and the inductive approach is used to answer the purpose with our thesis. The purpose of this thesis consists of two research questions, what the Swedish APA legislation implies and are there any differences between the Swedish APA legislation and other countries’ APA legislations. After analyzing this new Swedish legislation and performing the cross-country analysis we have come to the conclusion that in general APAs provides substantial benefits for Swedish corporations. With the main advantages being the increased predictability and the reduced administrative burden concerning TP issues. In order for the Swedish legislation to be fully beneficial for the corporations it is, however, in need of some adjustments. If adjustments to the legislation are made we conclude that APAs will only provide benefits for Swedish corporations.

Since Mainland China advocated economic reform in 1978, the government appealed to many Taiwanese firms invested with a purpose of boosting trade and investing in this fast growing market. Some of the Taiwanese firms took this opportunity to expand and attain more profit and gradually developed into partners with major international enterprises in the supply chains. In order to increase the visibility in the world and increase the fundraising scale, numerous overseas Taiwanese firms chose to be listed in capital markets. A drastic change in government policy was seen in Taiwan since 2008. The regulations regarding foreign corporations listing in Taiwan capital markets have been largely loosened, which led to a sudden surge of appetite among successful overseas Taiwanese corporations for returning to Taiwan and be primary listed or secondary listed. This study is focused on overseas Taiwanese corporations based in Mainland China, where most of the primary listed firms operate and manufacture products. The main pragmatic issues discussed in this study include operating, managing, accounting and tax, and customs procedures¡Ketc. with a focus on illustration and analysis of tax related risks these firms encounter due to regulations in Mainland China when doing overseas investment restructuring, equity transfer and so on. This study not only investigate the issues of regulations for primary listing of securities in Taiwan, but also utilize case analysis to depict the development of primary listing oriented overseas investment structure and the frame of controlling of share holder¡¦s stock holding structures. Through practical experiences and diagrams to reveal the overseas operation and trading models in illustrations, the study has generated following verified summaries: 1. Analysis of regulations in China and the risk of taxes when corporations trying to make adjustment of overseas investment structure and transition of stock equity. 2. Study Taiwanese entrepurers or foreign companies, most of them are conglomerates companies or family owned business with centralized stock equity where they have the capability to highly conrol the core copany while they go public with the regard to the ownership and the level of controls in operation. 3. Utilize the formate of stock holding by overseas investment compay or through trust, to fullfill the consideration of equity diversification or reduce the burden of taxation.

Recently, every main country in the world has implemented transfer pricing system in order to ensure every multinational enterprise would also be able to pay their taxes equitably and reasonably to the countries which they established their multinational enterprises, and has requested the prices of business transaction between every related party have to be set up and adjusted by arm¡¦s length principle. Moreover, in order to follow the initiative of OECD, adopt the current world trend, and avoid the higher inspection risk for our enterprises, Taiwan has established the method of regulation on December twenty- eighth, 2004 by consulting OECD guidelines and tax law of every country in the world, and has started to implement transfer pricing system. The Taiwanese transfer pricing system has integrated in many ways and in many-sided. It also has extended globally. If everyone could cooperate with mutual benefit, the transfer pricing system would be able to maintain the right of native taxation and effectively protect the right of multinational enterprises; hence it is not only a tax system, but art. Therefore, the checking model of transfer pricing system is very different from the case of normal profit-seeking enterprises. The checking model of the current tax authority mainly focuses on their jurisdiction and formal conditions, so it is interesting to see if our tax authority has capability of doing transfer pricing case which emphasizes on the point of taxation principles in substance or not. In addition, because our profit-seeking enterprises are mainly small or middle size corporations, there is a challenge to them to meet their duty and to provide all the requested certificates under the request of the new system, so it is also a point to discuss with. In this research, I tried to establish an evaluation standard by consulting policy estimated theory, and designed a survey which has collected all of recently related books, articles, references, and practiced thoughts in order to have an objective investigation. Also, in the survey, I would like to look into the situations of the following three points after practice of transfer pricing system. First, I would like to find out the thoughts of related interested parties after practice of this policy. Finally, what satisfactions of appropriateness, neutrality, efficiency, responsiveness, and side-effects externalities would be in this policy efficiency analysis? In addition, the collected data were analyzed with Chi-Square test, cross analysis, one-way ANOVA, multiple comparison analysis, and correlation analysis. In my major research findings, transfer pricing system has been known in the certain level by every related interested party. Moreover, this policy is in the high appropriate level and efficient level. However, this policy is in the low neutral level of land tax and other levies, and in the low responsive level. Therefore, there are other side effects in this policy as well, such us: increasing tax misgiving from every enterprise, increasing taxation, and checking cost, etc,. Also, in the result of this research paper, there are twelve suggestions that have collected from the responses of the survey, the problem finding, and some practical difficulties from the study of research institute and some other comments. These twelve suggestions could provide to related government organization as reference material in order to revise the law and advance tax system and tax policy.