Associated Enterprises : What is the meaning of “participation in control”?

by Carendi, Isabel; Lilliestierna, Maria

Abstract (Summary)
When associated enterprises situated in different countries sell goods and services between themselves, the transfer price may, because of different reasons, diverge from the market price. The divergence may be a consequence of tax planning, but it may also arise from other circumstances. To determine the right market price and thereby be able to make a correct taxation, most countries are committed to double taxation agreements, which are usually designed after the OECD Model Convention (hereafter OECD MC). Art. 9 of the convention provides for transfer pricing regulations and in this article the “arm’s length principle” is defined, stating that the pricing should be set according to the market price principles. When the transfer price diverges from the market price it must be established if the enterprises are associated or not, since the transfer pricing regulations only applies to associated enterprises. According to the OECD MC enterprises may be associated through capital, management or control, and it is the last notion, the notion of “control” that creates the greatest confusion. Neither in Art. 9 nor in the rest of the OECD MC, a definition of the notion exists, and it is nowhere stated how the criteria relate to each other. Further-more, guidance is missing describing in which situations the article is meant to be applica-ble.According to Art. 3(2) OECD MC, undefined terms shall be interpreted according to domestic law, unless the context otherwise requires. Art. 9 is often given a wider definition than the one provided in the OECD MC when domestic interpretation is used, which may result in an incorrect tax situation. Since the double taxation agreement only deals with the adjustment of double taxation, an adjustment cannot be justified by the use of the OECD MC. By broadening the scope of the article, the countries break the golden rule upon which most double taxation agreements rely, that a double taxation agreement may never be used to expand the right of taxation, only restrict it. The purpose of the thesis is to investigate how to give the term control an appropriate definition in line with Art. 9. Since the use of domestic interpretation may give unwanted results, the context requires an alternative way of interpretation. By giving the notion of control an autonomous treaty interpretation that reflects the purpose and context of Art. 9, the problem is avoided.
Bibliographical Information:


School:Högskolan i Jönköping

School Location:Sweden

Source Type:Master's Thesis

Keywords:international tax law transfer pricing the arm’s length principle associated enterprises


Date of Publication:09/11/2006

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