Transfer Pricing and Business Restructurings : Risk Allocation as set out in Issues Notes 1 of the OECD Discussion Draft

Abstract: The purpose of this thesis is to analyze the notion of risk as set out in Issues Notes 1, in the document “Transfer Pricing Aspects of Business Restructurings: Discussion Draft for Public Comment”. Furthermore, the approach of this draft is compared with the authorized OECD approach, established in the 2010 Report on the Attribution of Profits to Permanent Establishments. German law on transfer pricing provisions will also be examined to see whether domestic provisions could make a good example in allocating risks, as a supplement to the guidance from the OECD. Issues Notes 1 has been subject for a debate as to how it should be interpreted and whether the provisions laid down in the document provide the tax authorities of contracting states too much room for subjectivity in determining whether risk allocation scenarios as set up by associated enterprises have economic substance. It has also been argued that Issues Notes 1 is an attempt by the OECD to align risk allocation under Article 9 of the OECD Model Convention with the authorized OECD approach, applicable to permanent establishments, because risk allocation under Article 7 is conducted by applying the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations by analogy. There are however crucial differences between associated enterprises and permanent establishments which makes this impossible. The guidance under Issues Notes 1 is insufficient, why the OECD should seek to further clarify the concepts regarding business restructurings. The German way of implementing domestic provisions is incompatible with the provisions of the OECD and Article 9 and therefore violates most of its tax treaties.