handbook-tb

Adolfo Martín JimenézIn the final analysis, an evolutionary interpretation of the PEconcept by tax administrations of some developed countries revealsnot only that there is scope for different interpretation and applicationof the same concept, but also that tax planning is occurring in thisdomain, that there is discontent with the current situation and thatsomething should be done. There is also some evidence that avoidanceof PE status is not only a problem for developed countries but that it isalso affecting developing countries. A recent International MonetaryFund (IMF) paper explains the following:[A] large proportion of non-natural resource based multinationalbusinesses located in developing countries are organizedas low risk, routine, light manufacturing or commercialventures, rewarded with accordingly low profit rates. It iscommon, under the application of transfer pricing methods, toassign these operations a fixed rate of return for tax purposes,under which productivity gains rarely translate themselves intohigher local profit margins. A risk in introducing such simplifiedschemes, despite their attractions for administration, isthat they thus may not respond to changing commercial circumstance,and can perpetuate inappropriately low fixed profitrates in developing countries…Countering this aggressiveness would be greatly facilitated bydeveloping concrete guidance where it is lacking and repudiatingperverse interpretations of the ALP [arm’s length principle](commonplace and often tacitly accepted), such as condoning riskstripping and other arrangements that provide no documentedproductivity gain for the MNE. Carefully designed harbours thatapply a fixed mark up to certain costs can play a greater role thangenerally recognized [Brazil rules for transfer pricing could be anexample: minimum gross profit margins, very specific rules uponindices of commodities transactions, limitations on intracompanyexport transactions as a total of net export transactions]. 27While the latter part of the quote considers the problems of taxbase shifting from developing countries and solutions thereto from a“transfer pricing perspective,” ultimately it refers to “commissionaire”27IMF, “Spillovers in International Corporate Taxation,” (2014) PolicyPaper, International Monetary Fund, at 33.342