THE RECOGNITION OF THE EFFECT OF PASSIVE ASSOCIATION ON CONTROLLED TRANSACTIONS FOR TRANSFER PRICING PURPOSES

Abstract

This thesis examines a controversial and unsettled aspect of international tax law in the transfer pricing field: should the effect of “passive association” within a multinational group of companies be taken into account in pricing transactions between group members? The marketplace may assume, typically in a financing context, that (aside from any “explicit” support – the paradigm being a parent company guarantee) a group member experiencing financial distress will be supported by one or more affiliates. The paradox to investigate is the apparent contradiction between (i) the need, in arriving at an arm’s length price, to postulate a transaction between independent parties, and (ii) the possible recognition, in the pricing analysis, of effects deriving from corporate association. How far does the independence hypothesis extend? What features of affiliation must be disregarded in constructing that hypothesis? An absence of clarity and consistency between national tax systems in this respect presents multinational enterprise groups with legal uncertainty and the threat of international double taxation – a recognised obstacle to cross-border commerce. This study presents an analysis of supranational guidance; a comparative investigation of national tax laws in selected countries with sophisticated transfer pricing codes; and a critical review of relevant practitioners’ and academic literature. The arguments for and against the recognition of passive association are distilled and evaluated from a legal perspective. The quest is for the most rational, “black-letter” interpretation of existing laws. Alternative solutions based on policy judgments or economic theories are not pursued. Although the case for disregarding passive association cannot be dismissed casually, the contrary argument – for its recognition, as part of the relevant factual matrix, in pricing controlled transactions – appears convincing.