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This paper considers transfer pricing in VAT/GST and direct taxes, one of a range of tax relationships that flow between associated companies. The topic necessarily proposes an inquiry into vertical harmonization of transfer pricing norms alongside an assessment of present efforts to horizontally harmonize transaction values.

Stated differently, the vertical inquiry is: should the same transaction between the same associated enterprises be valued in the same manner by a single country in VAT/GST and direct taxes? The horizontal effort is: should two jurisdictions treat transactions between associated enterprises within their respective jurisdictions in the same manner in VAT/GST and direct taxes?

This is a complex undertaking for several reasons. First, there is another significant transfer pricing regime that exercises significant influence in this area - customs. In fact, the customs transfer pricing regime is more uniform globally. It is in active operation in many more countries than the OECD's guidelines. Customs law, in part because it is concerned with another transaction tax, has a great influence over VAT/GST rules. In many countries transfer pricing is non-existent in direct taxes, but vertically harmonized between customs and VAT/GST. Among jurisdictions with this tax profile there is full horizontal harmonization. These are not (for the most part) developed countries, but they are the overwhelming majority.

Secondly, the harmonization of transfer pricing norms is necessarily a two part inquiry: (1) are the parties "related," or are the enterprises "associated;" and (2) if so, what methods should be applied to verify an acceptable price. Considered globally, and considered from the three-way perspective of VAT/GST, direct taxes and customs, there are at least five ways of defining related parties or associated entities, as well as five operative methodologies for determining prices. There are further differences in details [jurisdictions may agree on the theory behind a definition or a method, but disagree on application or relative importance].

Rather than propose a wholesale revision of global transfer pricing regimes, something that would be unlikely and impractical, this paper suggests that a workable solution can be found in the APA process. Unilateral, but multi-tax [VAT/GST, direct tax and customs] APAs are proposed. As has happened in some instances already, these multi-tax unilateral APAs can be linked to tax-specific bilateral APAs. [For example, if a business relationship between associated enterprises is simple, with one entity only importing and re-selling products of a related manufacturer it is not important to have full horizontal harmony in valuation among direct tax, VAT/GST and customs. Only horizontal harmonization of direct tax valuation would be important. Vertical harmonization of valuation (VAT/GST-direct tax-customs) is nevertheless very important for the importer/reseller.]

Multi-tax APAs (alone) will not solve the whole problem. There are still significant timing and audit adjustment issues. If there is to be true vertical harmony in transfer pricing results, then it is necessary to assure that annualized direct tax pricing decisions are granularized in an agreed manner and that they are integrated into VAT/GST and customs results. In this area certification of automated systems [along the line of the US Streamlined Sales Tax] is proposed as part of a comprehensive IT-APA. Both aspects of this solution are workable and in operation in one or more jurisdictions today.

[This paper is prepared for the International Network for Tax Research (INTR) Conference, March 26-28, 2009, Organized by the Institute for Austrian and International Tax Law, Vienna University of Economics and Business and the Institute for VAT Research at Stockholm University]

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