The implementation of the OECD/G20 recommendations to avoid base erosion and profit shifting (BEPS) in the national tax laws is increasingly changing the long-standing transfer pricing practice. The adopted understanding of the arm’s length principle requires a thorough understanding of the value creation processes within multinational firms and the underlying value drivers:
„It is important to understand how value is generated by the group as a whole, the interdependencies of the functions performed by the associated enterprises with the rest of the group, and the contribution that the associated enterprises make to that value creation.” [OECD Transfer Pricing Guidelines]
This prerequisite directly results from one of the key objectives of the BEPS initiative, which is the alignment of profit distribution with value creation within multinational firms. In practice, the application of the latest OECD guidelines and recommendations go beyond the substantive tax law and requires economic experience and know-how. Consequently, tax judgments need to be supplemented with economic models and analyses to ensure a well-founded decision-making process and a proactively controlled transfer prices.