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September 16, 2014

2014-Issue 37—Just about a year ago, the United Nations (UN) got involved in transfer pricing. For many of us in the field of corporate tax, the UN’s pronouncement came and went without a lesson learned. Some of us thought “what could the UN add to a transfer pricing discussion that wasn’t already said by someone?” But now we are realizing that it’s not what the UN could add to the discussion that’s important, rather it’s knowing why they are getting involved in the first place. The UN’s entrée indicates that there are economic “conflicts” brewing globally relating to transfer pricing. This edition of Tax Advisor Weekly points out how transfer pricing is becoming a battlefield for economic conflict and how multinational companies are going to get caught in the crossfire. Intelligent organizations will be taking steps to better equip themselves for this possibility and to mitigate any potential damage.


In mid-2013, the UN released a draft of its alternative set of transfer pricing guidelines (United Nations Practical Manual on Transfer Pricing for Developing Countries). Although in large part consistent with the “traditional” guidelines from the Organisation for Economic Co-operation and Development (OECD), the UN version differs across numerous, significant concepts.

The UN transfer pricing guidelines are intended to be an alternative model for transfer pricing rules, specifically tailored for implementation by developing nations. Although the guidelines were released only a year ago, developing nations (including Tanzania and, in part, Nigeria) are already beginning to adopt the UN guidelines in favour of those released by the OECD. At its core, this development will mean the same transaction may be treated differently by an OECD nation than a UN nation. Without adequate treaty protection, this will likely result in double taxation.

Why the UN?

Over the years, the role of the UN has expanded radically. Under the UN’s Economic and Social Council now sits the UN tax committee (the UN Committee of Experts on International Cooperation in Tax Matters). The UN tax committee strives to maintain its own model tax treaty (designed specifically to aid developing nations in treaty negotiations with developed nations) and help developing nations keep pace with developed nations in the sphere of domestic taxation. This has now expanded further to include transfer pricing.

The view that developing nations need specific guidelines for transfer pricing is, itself, controversial. Developing nations have argued that traditional transfer pricing favours more developed nations. Placing the focus on where risks are controlled and managed naturally allocates profits to the headquarter-type locations of a multinational. On a global scale, these profits are thus shifted from developing nations to the “first world,” where the majority of multinationals have their headquarters and allocate their economic risk. An OECD purist would argue that this reflects global reality, and it isn’t up to transfer pricing to correct such an imbalance. Unsurprisingly, relatively advanced nations historically at the “limited risk” end of the transfer pricing spectrum (namely Brazil, India and China) vehemently disagree.

When considering the shape of the UN’s transfer pricing guidelines, consultation was sought from numerous perspectives. The tax committee membership included industry representatives, traditional OECD nations and breakaway nations that have adapted their local transfer pricing legislation away from the typical, OECD understanding of “arm’s length.” Notably, an entire chapter of the UN guidelines is dedicated to the idiosyncrasies of our favourite transfer pricing nations: Brazil, India, China and South Africa.

Practical Implications of the UN Guidelines

At its core, the UN guidelines serve two purposes. Primarily, these guidelines are a practical how-to manual for setting up transfer pricing rules from scratch. They outline the principles in a back-to-basics approach, enabling developing nations to implement transfer pricing legislation without necessarily requiring the background in economic theory developed nations take for granted. Many of the fundamental principles of OECD transfer pricing are retained.

Under the surface, however, lies the second, and perhaps more important purpose: it seems the UN is attempting to placate India, China and Brazil by accepting their transfer pricing views and potentially sanctioning them for use by others.

As an example, within the UN guidelines, India and China have both advocated adjustments to traditional transfer pricing to reflect the advantages a multinational has through local (albeit “limited risk”) operations. India, for example, maintains the view that contract R&D services performed locally require a reward commensurate with the contribution these services are making to the intangible property of the group. This is regardless of the fact such an entity may be considered to be “limited risk.”

China, in a similarly non-standard view, outlines that a multinational may receive many benefits through operating in China beyond those which the OECD would remunerate. These could include Chinese remuneration for greater access to the significant Chinese market, savings through operating in a low-cost location and wider enhancement of the local brand (even if the local service is, for example, contract manufacturing).

It is a struggle for a transfer pricing economist to reconcile these concepts with the arm’s-length principle. More importantly, it is a struggle for the revenue authorities of OECD nations (including the U.S.) to reconcile these views with their own. As a result, the U.S. and India, for example, may calculate the appropriate transfer pricing reward radically differently. This divergence, without adequate planning, can now easily result in a cash tax cost.

The UN guidelines give developing nations the tools to introduce transfer pricing rules consistent with the non-standard views currently gaining global traction. It is naturally in the interest of developing nations to adopt the UN guidelines in favour of the OECD when the result is higher domestic tax revenue. Further, given the strength of the economic precedent (Brazil, China and India rising up the GDP rankings faster than almost all other developed nations), the OECD’s leverage on “undecided” nations only seems to be decreasing.Bottom line: Transfer pricing is splitting into distinct schools of thought, and the natural casualties will be the unprepared multinationals.

Alvarez & Marsal Taxand Says:

What should U.S. multinationals be doing? Despite the goal of “promoting international tax cooperation among national tax authorities”, the UN guidelines serve to increase the potential for international disagreements. To prepare, multinationals should:

  • Wherever available, consider obtaining advance pricing agreements (APAs). The availability of APAs is growing  (notably with India adopting this procedure in recent years), and while the process may take multiple years, for a business with a stable growth plan, an APA may be a valuable contribution towards global effective-tax-rate certainty. Note, however, that there are still significant countries where a bilateral APA is not an option.
  • Increase internal resources dedicated to the supervision and implementation of transfer pricing policies. This should be an ongoing role, ensuring continued compliance as well as optimal initial structuring. Complete, contemporaneous and compelling supporting documentation of all transfer pricing positions should be maintained.
  • Investigate whether entities in higher-risk territories can be taken outside the scope of transfer pricing entirely, either through divestment or through the use of local service providers.
  • Where possible, non-aggressive, or “small-ball,” positions may be taken in the key combative territories. This may include, e.g., avoiding branch structures and using multiple local entities.
  • And finally, whenever responsible for reporting financial results to stakeholders, strongly consider booking reserves for the likely cost of getting caught in the crossfire.


Albert Liguori
Managing Director, New York
+1 212 763 1638

Laurie Dicker, Managing Director, and Kieran Taylor, Senior Associate, contributed to this article.

For More Information:

Marc Alms
Managing Director, New York
+1 212 763 1887

Laurie Dicker
Managing Director, Washington DC
+1 202 688 4215

Albert Liguori
Managing Director, New York
+1 212 763 1638

Tom McFarlane
Managing Director, London
44 207 072 3201

Richard Syratt
Managing Director, London UK
020 7863 4722


The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

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