IT-APAs: Harmonizing Inconsistent Transfer Pricing Rules in Income Tax - Customs - VAT

128 Pages Posted: 11 Sep 2007

See all articles by Richard Thompson Ainsworth

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law


In most jurisdictions there are three separate spheres of transfer pricing analysis - income tax, customs and VAT. Although they share policy objectives, terminology and frequently borrowing methodologies from one another these domestic transfer pricing systems are not in harmony.

Businesses find this lack of harmony costly, problematical, but also a planning opportunity. The door is open for arbitrage.

What if the transfer pricing rules within a jurisdiction were harmonized? The World Customs Organization (WCO) and the Organization of Economic Cooperation and Development (OECD) are considering this question.

This paper synthesizes the range of transfer pricing regimes currently in use, and argues that an affirmative answer to the WCO/OECD's harmonization question can only be realized through technology - specifically, an IT-APA (Information Technology - Advance Pricing Agreement). Inherent differences embedded in the annual income tax are nearly impossible to harmonize with transaction taxes like customs and VAT if what is envisioned is a single, monolithic transfer pricing standard. If instead one imagines a standard that employs flexible, integrated rules, where separately harmonized (vertical and horizontal) elements are brought together in a certified automated system, then a harmonized transfer pricing standard can be realized.

It is reasonably clear that the real barriers to vertical harmonization of transfer pricing rules in income tax, customs and VAT have to do with timing and granularity. Income tax valuations are completed much later in time than customs and VAT regimes are comfortable with. Transaction taxes are designed around either having a number or a fixed formula that will objectively determine the number that is the tax base. An IT-APA harmonizes transfer pricing results by using a fixed formula. The formula is embedded in the taxpayer's VAT and customs software, and linked through the ERP to the financial statements and the income tax return. Certification of this digital valuation formula solves the timing issue in vertical harmonization.

Keywords: Transfer Pricing, World Customs Organization, Organization for Economic Cooperation and Development, WCO, OECD, Customs, VAT, Income Tax, Vertical Harmonization, Horizontal Harmonization

JEL Classification: H20, H21, H29, H89, K34

Suggested Citation

Ainsworth, Richard Thompson, IT-APAs: Harmonizing Inconsistent Transfer Pricing Rules in Income Tax - Customs - VAT. Rutgers University Computer & Technology Law Journal, Fall 2007, Boston Univ. School of Law Working Paper No. 07-23, Available at SSRN:

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

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New York, NY 10003-711
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Boston University - School of Law ( email )

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