Special Features of the UN Model Convention

1. S. 192Introduction

Each enterprise has a desire to stay ahead of the other enterprises. To take the lead, enterprises are looking for economic rents. An economic rent could be defined as a surplus of profitability obtained by a company with a competitive advantage. Economic rents include location specific advantages (LSAs) and are directly linked to the value creation. The creation of value is a concept in transfer pricing which allocates profit to an associated enterprise with respect to a functional analysis, i.e. according to the assets, risks and functions attributable to the associated enterprise. LSAs especially concern economic rents located in one country. In contrast to associated enterprises, independent enterprises cannot acquire advantages in different regions in the world. This statement differentiates MNEs from independent enterprises. Hence, an arm’s length price reflecting the remuneration of the incremental profit attributable to the LSAs may be difficult to find. Moreover, it might be complex to find appropriate comparables and thus, diminishing the use of the traditional methods of transfer pricing.

LSAs first appeared in US legislation. Since 1994,he US section 482 o...