The “realistic alternatives” principle in transfer pricing was afforded a comprehensive evaluation. It allows for intercompany transactions to be valued by reference to alternatives that were reasonably available to the parties at the time of the transaction. Under the realistic alternatives principle, as expressed in the US Regulations and Organization for Economic Cooperation and Development (“OECD”) Guidelines, parties to an arm’s length transaction would only enter into that transaction if no alternative was more attractive.
Some participants in the NABE Transfer Pricing Symposium expressed concern that the realistic alternatives principle could be used by tax authorities to re-characterize intercompany transfers by basing valuations on alternative intercompany arrangements. There is therefore the question of whether the framework is at odds with US Regulations, which compel the Commissioner to evaluate the results of a transaction as actually structured by the taxpayer unless its structure lacks economic substance. However, the US Treasury’s view is that looking to alternatives is a relevant valuation principle that does not automatically re-characterize a transaction.
The panel concluded with case studies for applying the realistic alternatives framework in business restructurings and acquisitions, highlighting the ambiguity of the principle in practice. Much of the discussion centered on form versus substance of the Principal in a transaction and the resulting rights to residual profits. The panelists agreed that more guidance is necessary on the realistic alternatives framework, including possibly with respect to the functions and risks which give substance to a principal claimant.
Source: Ceteris Transfer Pricing Times, August 23, 2012, Volume IX, Issue 8