This article assesses the desirability of our current, arms' length based, transfer pricing regime by analyzing its theoretical and practical effectiveness in application to transfers of intangibles. A detailed analysis of the practice of valuation of intangibles, which is the key component in the application of this regime, exposes its weaknesses that result in undesirable market incentives. These incentives create a strong bias in favor of large multinational enterprises, yet, even if one favored such bias, it is achieved using an uncontrollable, costly and wasteful legal mechanism. The article particularly criticizes the regime's disregard of the unique characteristics of intangibles that make them difficult to valuate; its disregard of the differences between types of intangibles; and its extraordinary narrow and limited approach to valuation.
The article demonstrates that the undesirable reliance of our transfer pricing regime on the arms' length principle is the primary reason for the grim picture portrayed, and therefore advocates its replacement with a formula-based regime. The article's contribution in this regard is the argument that it is not only practically more desirable and less costly, but that it is also more coherent and natural to our general international tax regime; therefore, in terms of design, transfer pricing reform should take into account the basic premises of such regime. Some of the criticism and conclusions of this article are about our general transfer pricing regime, while the analysis is limited to the valuation of intangibles' aspects, yet, since this is probably the area that presents the most acute challenge to the current regime, so building upon it may be an important step towards reform.
Yariv Brauner, Value in the Eye of the Beholder: The Valuation of Intangibles for Transfer Pricing Purposes, 28 Va. Tax Rev. 79 (2008), available at http://scholarship.law.ufl.edu/facultypub/18