UN Tax Committee Initiates Discussion on Arm's-Length Principle for Two Key Industries

The United Nations Tax Committee has responded to calls from tax administrations in developing countries by introducing industry-specific transfer pricing guidance in a bid to provide practical insights into applying the arm's-length principle. These papers, unveiled during the committee's bi-annual meetings held in Geneva from October 17 to 20, address the agricultural products sector, focusing on coffee and soybeans, as well as the pharmaceutical industry.

This move is part of a broader initiative as the UN Tax Committee set up the Subcommittee on Transfer Pricing in 2021, comprising six workstreams. Aside from the papers on agricultural products and pharmaceuticals, the remaining four streams cover topics such as the impact of the COVID-19 economic downturn on transfer pricing, compliance assurance, carbon offsets and credits, and dispute avoidance and resolution.

The pharmaceutical industry guidance explores the global value chain within the sector and examines practical transfer pricing issues, including transaction delineation, comparability analysis, and the application of transfer pricing methods. It acknowledges that transfer prices of tangible products in the pharmaceutical sector may vary for multinational companies, encompassing processes like the sale of active ingredients, secondary formulation into finished products, and onward distribution to third parties.

Selecting a suitable transfer pricing method within the pharmaceutical industry isn't straightforward, with the paper noting that the controlled uncontrolled price (CUP) method, which compares prices in controlled and comparable uncontrolled transactions, may not always apply due to differences in product comparability. In such cases, methods like the resale price method or the cost-plus method may be more appropriate, depending on functions, assets, and risks (FAR) analysis of the controlled taxpayer.

Key aspects for taxpayers in the pharmaceutical industry to consider include factors like price controls, parallel imports, patent management, and the impact of COVID-19. The paper identifies core value drivers and intangible assets in the pharmaceutical industry as patents, trademarks, marketing intangibles, and technical know-how.

In the agricultural products paper, attention is directed towards transaction delineation, comparability analysis, and the selection and application of transfer pricing methods. It highlights the essential business value drivers for multinational enterprises (MNEs) in the agricultural industry in developing countries, including technology development, marketing intangibles, group synergies, cost savings, and hub structures.

The paper particularly emphasizes the importance of the controlled uncontrolled price (CUP) method for commodity transactions when relevant information is available. However, it acknowledges that a lack of information or trustworthy comparables can limit its reliability. In such instances, the transactional net margin method (TNMM) is typically applied.

Agriculture, a sector of global economic significance, plays a crucial role in many countries' value chains. Among the commodities in focus is coffee, which holds substantial importance in the developing world. The International Coffee Organization (ICO) data reveals that Arabic coffee accounted for 58% of global coffee production in 2022, with Robusta coffee making up the remaining 42%. The top coffee-producing countries include Brazil, Vietnam, Colombia, Indonesia, Ethiopia, Honduras, India, Uganda, Mexico, and Peru.

In addition to coffee, the paper also spotlights soybeans, another commodity analyzed by the subcommittee. The global production value of soybeans has shown substantial growth over the years, with countries like Brazil and Argentina being key players in soybean production.

These papers are currently open to discussion and debate after their presentation during the Geneva meeting for "first consideration." They involve coordination from the Subcommittee on Transfer Pricing, which consists of 23 members, including tax officials, executives, practitioners, and academics, with co-coordinators from Sweden and Nigeria.

The introduction of industry-specific transfer pricing guidance reflects the ongoing efforts to provide practical assistance to developing countries in applying the arm's-length principle in their tax administrations.

By fLEXI tEAM