As part of the action plan on base erosion and profit shifting consideration is being given to ways to improve the transfer pricing rules. According to an official of the Organization for Economic Cooperation and Development (OECD), the arm’s length principle as currently set out by the OECD may need to be supplemented by other types of measure to deal with certain difficult situations. An example of this type of difficult situation is transfer pricing for transactions involving intangibles where there are insufficient comparable transactions. An official of the OECD recently said in a transfer pricing conference in Paris that other approaches, including the “commensurate-with-income approach”, may be required for the valuation of intangibles.

While transfer pricing rules are generally based on the pricing of the transaction at the time when that transaction takes place, the “commensurate with income” rule as used in the US makes use of hindsight to adjust prices in respect of certain intangibles when the outcome differs significantly from that envisaged at the time of the transaction. The IRS in the US would however argue that this is in line with the practice of some independent parties when drawing up a contract in respect of intangibles.

The OECD has recently been concerned with drafting the Action Plan against base erosion and profit shifting (BEPS). Since the OECD transfer pricing guidelines were first drawn up the arm’s length standard has been the basis of transfer pricing rules, and the principle is currently respected by most countries of the world.