handbook-tb

Jinyan LiThe separate entity, transaction-by-transaction, comparableapproach endorsed by the OECD Transfer Pricing Guidelines forMultinational Enterprises and Tax Administrations 101 are difficultfor developing countries to administer. As noted by China and Indiain Chapter 10 of the United Nations Practical Manual on TransferPricing 102 (2012), it is extremely difficult to find comparables in transitioningeconomies. Through BEPS structures, MNEs often treatsubsidiaries in developing countries as limited-function entities andattribute profit to them for their so-called routine functions. Local contributionsto the global value chains of these MNEs are often ignored.The tax base of developing countries would therefore suffer under thecurrent transfer pricing rules, which fail to recognize the economicreality of MNEs operating as single-minded entities through coordinationmade possible by digital technology.Despite the rigidity of the OECD rules, it would be in the interestof developing countries to work with the OECD in designing measuresto address artificial transfer pricing manipulation. More importantly,developing countries should probably advocate a move to the use of aprofit split or other profit apportionment methods based on the valuechains used by MNEs. Value created by data, by people as consumersand producers, should be appropriately recognized, and value attributableto risks that are within the control of MNEs should not be inflatedthrough internal contracts. If MNEs act as unitary business beings,they should be treated as such in tax law. A global profit split methodbased on some measurements of profit (for example, the use of data,sales, and so on) derived in each country in which an MNE has a significantbusiness presence may be an appropriate option.4.6 Characterization and withholding taxExpanding withholding taxes to cover payments for digital transactionshas been suggested as a possible option. 103 The current United101OECD, OECD Transfer Pricing Guidelines for Multinational Enterprisesand Tax Administrations (Paris: OECD, 2010).102United Nations Practical Manual on Transfer Pricing for DevelopingCountries (New York: United Nations, 2012).103OECD, Action 1 — 2014 Deliverable, supra note 3, at 146.446