handbook-tb

Peter A. Harrisof 100 for tax purposes and considers that Z has no gain or loss.Because Z and Y are related, Country B applies a market valuerule to the transaction and so considers the asset to have been purchasedfor 150. Country B proceeds to grant a deduction for that150 (either through depreciation or on sale of the asset by Y).There is a mismatch between Country A and Country B in the priceconsidered paid for the asset for tax purposes. The discrepancy of50 (difference between 100 and 150) results in a tax benefit (deductionin Country B) with no pick-up in Country A (no income orgain). In a reverse scenario (price considered received is higher thanprice considered paid), there is scope for application of correspondingadjustment rules in the transfer pricing provisions of tax treaties.While these rules protect taxpayers from many types of doubletaxation, in most countries they have no application in this scenariowhere the application of domestic rules results in undertaxation.In this example, there are two payments (bestowals of value);one being the transfer of the asset from Z to Y and the second beingthe cash payment from Y to Z. Both Country A and Country B agreeas regards the quantum of the first payment (the asset). However, theydisagree as to the quantification of the consideration paid for thetransfer (the cash payment). Country A accepts the payment at its facevalue and calculates the gain/loss of Z from the transaction accordingly.By contrast, Country B deems Y to have paid an amount equalto the market value of the asset received. The result is that Country Bgrants a deduction (currently or in the future) for an amount that ismore than was brought into account in Country A when calculatingthe gain or loss of Z. Again, this case should not be confused with similarexamples that focus on other income tax fundamentals but alsoresult in a smaller amount being brought into account in one countrythan is deducted in another country. One such similar example iswhere one country considers a payment received to be wholly capitalin nature but the country of the payer considers it a mixture of revenue(for example financing expenses) and capital.Example 5 is a simple illustration of a mismatch between twocountries that recognize a payment, but disagree as to the time atwhich the payment should be recognized for tax purposes.200