Transfer Pricing, Integration and Synergy Intangibles: A Consensus Approach to the Arm’s Length Standard

A common critique of transfer pricing analysis under the arm’s length standard is that it is conceptually incapable of dealing with synergistic gains and losses among entities under common control. Specifically, its approach of respecting the separateness of corporate entities under common control and on allocating profit across such entities by reference to a baseline of uncontrolled, but comparable, situations cannot, under this critique, account for profits from integration, as they derive from the very fact of common control. This article addresses the question whether the arm’s length standard should be modified to incorporate a distinct “synergy intangible” to take account of such synergistic gains and losses. The article concludes that the introduction of a synergy intangible is undesirable, as it would not serve the core aim of transfer pricing analysis (in the treaty context) to reduce the risk of double taxation, while achieving a reasonable allocation of tax base across countries. In the service of this argument, the article introduces a three-part categorization of intangible value arising from the integration of assets: common control value, bilateral integration value and unilateral integration value. The article then urges a novel “fractional” interpretation of article 9 of the OECD Model, under which the article is read to reach only those profits that could be earned at arm’s length and thus does not speak to the allocation of profits that can only be earned under common control. The paper uses this framework to suggest particular approaches for dealing with synergistic gains and losses for each of the three types of value identified: the value from common control should be left to taxpayer discretion; the value from bilateral integration should be dealt with through attention to arm’s length ranges; and the value from unilateral integration should be dealt with through rules on aggregated transactions. The article concludes with prescriptive implications for the ongoing work of the OECD regarding intangibles and transfer pricing.