During the recent Annual Institute on Current Issues in International Taxation, Peter A. Barnes
commented on whether special measures are needed to prevent inappropriate returns from accruing to an entity based on contractually assumed risks. For the complete article, please visit Worldwide Tax Daily's website
(subscription required). Excerpt taken from the article "Experts Disagree on Transfer Pricing Special Measures" by Amanda Athanasiou for Worldwide Tax Daily.
But Peter Barnes of Caplin & Drysdale cautioned that special measures would open a Pandora's box, with the result that "taxpayers can't plan and tax administrators can't administer."
"I don't see this notion that you somehow have to have a lot of activity in order to have risk-reward return," Barnes said, attributing much of the allocation challenge to taxpayers asserting that something is low risk and then behaving as if it is not. "If you overlay special measures . . . you make the current system worse," said Barnes, who added that he supports the use of safe harbors and the preservation of the arm's-length standard and separate entity accounting.
High risk and high reward or loss can exist in an area of low activity, Barnes said at the December 12 GWU-IRS forum. To disregard that and allocate the income elsewhere "bothers me a lot," he added.
Barnes offered as an example a Bermuda subsidiary of a U.S. multinational that uses $1 billion of capital contributed by the U.S. parent to invest in S&P 500 index funds. "There's no question that the entity that earns that income or bears that loss is the Bermuda company," he said.
Self-Help in Developing Countries
"It's awfully hard to fix rules where there is no victim, or the victims can help themselves," Barnes said, referring to a policy discussion about developing countries as "paternalistic."
"The fact that countries are cutting back on CFC rules, not extending them, strikes me as evidence of what people really believe," which is that the territorial system they are implementing attracts inbound investment, he said.
Barnes mentioned Singapore and Mauritius as countries that have relied on increasing jobs and inbound investment in skills training, rather than large tax collections, in their development. "I think victims have plenty of ways to address their concerns," Barnes said, adding that while he admires Singapore's clear policies, he doesn't see a way to extract risk from other income-producing elements to help developing countries along.
"I worry what we're doing here is saying 'but we need the money,' and to me that's not a principled process that either tax administrators or taxpayers can use for the long term," Barnes said.