The use of a simple and well-established economic model demonstrates that integrated operations result in aggregate profits for the subfirms that equal or exceed what independent parties would earn by seeking to maximize individual profits. Greater profits are realizable because the MNE has production and distribution options available to it that are unavailable to arm's-length firms. This results because of the implicit assumptions required to appropriately apply each method. Failing to account for these effects overstates an arm's-length income for the manufacturing subfirm. And if traditional volume adjustments are made to the CUP, income is overstated for the distribution subfirm.
Similar results flow from the other traditional transactional methods endorsed in the guidelines.
It is encouraging that the OECD accepts the use of other methods to attain the arm's-length principle, but troublesome that Revenue Canada does not. This clearly limits the ability of Canadian taxpayers to adopt a fair methodology, such as one based on an economic analysis that allows the development of perfectly comparable arm's-length relationships and overcomes the problems outlined above.