Amazon, Medtronic, the OECD on Risk Analysis: Thesis on Transfer Pricing
Authors: Lincoln Charles Edward Andrew 
Published: July 2018

The mission of this thesis is to demonstrate the diverging adherence to contracts of the OECD and US in risk allocation for transfer pricing purposes as featured in BEPS Actions 8-10. The OECD adopts a principal of objective behavioral—non-agency—analysis of economic activity, which is impracticable and unworkable. The OECD denies that accurate legal contracts accurately delineate legal relationship. This implies an inherent fraud in corporate business management, which if true would be criminal in most countries—the OECD is implying everything in writing is a lie. The OECD denies the tax implications of principle-agent legal agency relationships as defined by contract law in its transfer pricing recommendations. On the other hand, the U.S. Tax Court still looks to the agency relationships between corporate entities. The U.S. Tax Court follows the correct approach.Corporate management can be divided between principle and agents. People usually think about management and shareholders, but there are also risk managers and asset managers that can be bifurcated. In terms of management, the bottom of the hierarchy is the managers of the factories. The capital fund managers or the shareholders have all the power—it will be taxed here not at the managers of the factories. The managers at the top of the hierarchy will get the highest level of remuneration. Reliance on contract is the only way that makes sense. Tax is based on legal—rather than equitable—matters. How would one tax equity?Two polar opposites define the alternative approaches to the proper appraisal of income for purposes of taxation for transfer pricing. On the one hand, the United States Tax Court has focused largely on contractual language and terms of agreement. On the other, hand the OECD through BEPS jurisdictions (most of the rest of the world where policies have been formulated) choose to analyze actual economic behavior and reality independent of the mere words chosen by the parties.Globalization and technology have greater importance in our daily lives every day. As technology and industrial processes grow every day, technology leads to greater globalization, and greater globalization of supply chains leads to more efficient and efficient technology. For example, years ago, heart problems would lead to death, but now small “battery” type instruments (pacemakers) can prevent heart attacks. The examples of the health benefits from technology are endless.As technology becomes greater and more efficient, globalization has also created supply chains and industrial production processes that are no longer local. As global supply chains increase in complexity, profits need to be properly allocated to certain jurisdictions for taxation purposes—to raise revenue support government functions for society’s benefit. This is a fundamental issue of international taxation. The leading principle for the allocation is the arm’s length principle, according to which related enterprises must charge prices that would have been charged in the open market. Although the principle’s goal aims at avoiding profit shifting, multinational enterprises for years used to shift profits to low tax jurisdictions to avoid taxes in high tax jurisdictions. In the early part of the 21st century increased to attention to these phenomena has lead to the OECD’s Base Erosion and Profit Shifting (BEPS) project to combat this harmful tax competition. This is the most groundbreaking change to the international tax treaty framework since the 1920s—that was initially set up to facilitate cross-border trade. This BEPS project has led to fundamental proposals—as a type of model law—to change the international tax system.