handbook-tb

Tax incentives: protecting the tax basein developing countries. While it is still too soon to determine whetherit will be successful, the work will likely produce results that will beuseful to tax authorities in developing countries. For example, if theOECD provides a summary of “best practices” to address specificabuses, then this work may aid developing countries in reformingtheir domestic tax law to improve the effectiveness of their tax regime.Depending on how well the proposed recommendations work in thetax environment in developing countries, great potential exists toimprove rules related to such items as hybrid arrangements, CFC rulesand provisions to curtail excessive interest stripping.Similarly, developing countries could be major beneficiaries ifthe OECD project on BEPS increases the quality of information availableto tax authorities. Again, this assumes the information is in aform that can be useful to tax authorities. So, for example, countryby-countryreporting requirements and rules that require taxpayers todisclose aggressive tax planning arrangements could prove extremelyuseful to tax authorities in developing countries.One important area in which the OECD project on BEPS couldbe useful to developing countries is transfer pricing. While the OECDhas stated that they will maintain the basic foundation of arm’s-lengthpricing, it likely does not preclude the introduction of “formula apportionmentmethods” as part of a nominal arm’s-length pricing regime.Here, the work of Reuven Avi-Yonah is useful in thinking aboutreform alternatives. He contends that the different types of transferpricing arrangement are not a stark choice between arm’s-length pricingand global apportionment but rather the choice of a point on thecontinuum that best works for a particular type of transaction (seeFigure 2). 47The insight here is that changes in methods of determiningtransfer prices will likely change the allocation of taxable incomeamong countries. In many instances, the move towards globalapportionment–type methods will increase the taxable income47Reuven S. Avi-Yonah, “The Rise and Fall of Arm’s Length: A Study inthe Evolution of U.S. International Taxation,” (1995) Vol. 15, Virginia TaxReview, 89.493