Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax

Author: Bradford D.F.

Source: International Tax and Public Finance, Volume 10, Number 5, September 2003 , pp. 591-610(20)

Publisher: Springer

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Abstract:

In a previous paper I described how the tax design called the X Tax would facilitate an international tax system free of many of the complexities and avoidance opportunities plaguing the existing international tax regime and also have neutrality properties generally deemed desirable. A choice must, however, be made between two basic treatments of transborder business transactions—the origin and destination principles. The destination-principle approach sidesteps the need to identify arm's length terms of transborder transactions between related business entities—the transfer-pricing problem. This serious problem remains in the origin-principle approach, which, however, presents fewer challenges of monitoring the flow of goods and services across borders, obviates what I call the “tourism problem” whereby people can reduce their taxes by consuming in a low-tax jurisdiction and, arguably most important, avoids transition effects associated with introduction of the tax and subsequent tax rate changes that occur in the destination approach. In this paper I explore possible special rules for transborder transactions between related parties in an origin-based system to eliminate the transfer-pricing problem.

Keywords: transfer pricing; origin-basis; destination-basis; consumption; VAT

Language: English

Document Type: Research article

Affiliations: 1: Woodrow Wilson School, Princeton University; New York University School of Law; National Bureau of Economic Research, Cambridge, MA, USA; CESifo, Munich, Germany. bradford@princeton.edu

Publication date: 2003-09-01