UN’s Public Transfer Pricing Database Faces Serious Roadblocks

The United Nations’ ongoing efforts to alleviate information asymmetries between taxpayers and tax administrations are worthwhile but face long odds of success.

Late last month, the UN Intergovernmental Negotiating Committee on International Tax Cooperation, or INC, released a concept note elaborating on an earlier proposal to establish “a public UN-managed transfer pricing database accessible to all Member States” or an alternative solution involving member states pooling purchases of existing commercial databases.

The proposal is admirable in attempting to resolve disparities between the data used by taxpayers to set and defend their transfer pricing policies and the data used by tax administrations to audit and assess those policies. The problem often results from a combination of lack of transparency, patchy data quality, and prohibitive cost of access.

A “single source of truth”—especially via the UN’s preferred option of a public database hosting financial and transactional data on comparable uncontrolled companies and agreements—would help reduce the unproductive, inefficient, and all too common practice of disputing data sources before the transfer pricing’s economic and legal substance can even be evaluated.

But as often is the case with multilateral tax negotiations, vested interests and questions of sovereignty likely will render the INC’s progress toward eliminating information asymmetries in transfer pricing halting at best—and doomed at worst.

Role of Database

Transfer pricing economic analyses mostly rely on benchmarking two metrics. One is the prices charged in a controlled (intercompany) transaction versus those charged in comparable uncontrolled arrangements. The other is the profitability of a “tested party” arising from controlled transactions with affiliated entities versus margins earned by comparable uncontrolled businesses.

The uncontrolled transactional or company-level data usually is pulled from databases run by large, private financial services companies. These companies then source the data from public filings required by local corporate regulations, such as the Form 10-K in the US or annual reports in European countries.

The benchmarking process generally starts with a taxpayer—often with an expert adviser—conducting benchmarking analyses to set and later document transfer pricing policies. This process may continue through a tax administration’s audit evaluating the appropriateness of the policy. Frictions therefore arise when the taxpayer’s policy and the tax administration’s examination reference different benchmarking data.

Causes of Disparities

Information asymmetry may result from any or all of several factors, such as:

• Capacity imbalances: For example, a tax administration may reference a large, expensive database that a small, cost-sensitive taxpayer is unable or unwilling to license. Vice versa, a large multinational may operate in a small, resource-constrained jurisdiction.
• Approach to comparables selection: Benchmarking requires the exercise of judgment on how to establish comparability. For example, a taxpayer may trade geographic comparability for functional comparability by referencing a pan-regional set, while a tax administration may take the opposite approach with a country-specific set.
• Data opacity and selectivity: Taxpayers and tax administrations often seek to use databases and results that produce outcomes favorable to their own objectives. Also, in some cases (Mexico is a prominent historical example), tax administrations use financial data from databases unavailable to taxpayers and have no obligation to share the source of their comparables analyses.

These issues regularly undermine the effectiveness of transfer pricing audits, assessments, and dispute resolution.

INC’s Proposed Solutions

The INC’s primary proposal is to establish and manage a public database accessible to all member states. This would level the playing field by providing equitable access to high-quality transfer pricing data across regions and transaction types.

Acknowledging the challenges in governance, cost, and control such a solution might entail, the INC proposed an alternative solution of pooled purchasing agreements, in which countries would contribute toward bulk, reduced-cost subscriptions to existing and reputable commercial databases.

The first option would be more effective in reducing information asymmetries, as it promotes consistency across tax administrations as well as between administrations and taxpayers.

A Practitioner’s Perspective

The proposals acknowledge that both solutions would face technical hurdles, including the need for assistance, training, and knowledge-sharing and clear processes and safeguards for joint sponsorship and common management. These seem relatively benign in the age of artificial intelligence and the “information economy.” The headaches caused by data sourcing can seem like a 20th century relic in the context of modern tax compliance.

However, age-old matters of geopolitics and vested interests likely will forestall serious progress toward widespread adoption of common or pooled databases. Tax administrations guard their ability to interpret comparability and impose transfer pricing adjustments, and any attempt to bind administrations to a universal database would attract disagreement and criticism over who ultimately develops and maintains the master data.

Meanwhile, database providers likely would mount a formidable lobbying effort against any supranational approach to public data access and management, arguing with some justification that their products are backed by years of investment and accumulated expertise that a thinly stretched UN committee wouldn’t easily assume.

And taxpayers likely would challenge the integrity of data in the same under-resourced markets that the INC’s proposal aims to bolster—for example, disputing the reliability of emerging market financial reporting. In the event of a pooled database for administrations, taxpayers may see themselves as being coerced into licensing the same databases.

Change requires broad-based consensus, while the status quo prevails in any other scenario. The INC’s elegant solutions to an anachronistic problem may prove as elusive as other multilateral tax proposals currently languishing in the development phases.

The INC’s proposals are intended to inform discussions at its Nov. 10–Nov. 19 session. Member states and stakeholders, including tax and transfer pricing practitioners, should review and provide feedback on the feasibility, governance, and design of the proposed solutions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Chad Martin is a principal of transfer pricing services at Eide Bailly.

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