Limiting Base Erosion

S. 4321. Introduction – Arm’s length principle and location savings

Location savings have become a hugely important issue in the global economy where multinational enterprises (MNEs) can spread their presence geographically to utilize benefits from specific and uniquely advantageous locations. The concept of location savings is acknowledged by both the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (OECD Guidelines) and the United Nations Practical Manual on Transfer Pricing for Developing Countries (UN Manual). Both provide general guidelines to determine the attribution of location savings in accordance with the arm’s length principle.

Recently the application of the arm’s length principle to the location savings context has generated a great amount of discussion. Tax administrations around the world have radically different views. This has commonly been attributed to two reasons. Firstly, there have been some inconsistencies and confusion in defining the issue (for example, location savings, location specific advantages, location rents). This leads to contradictory views on how potential super-profits should be attributed to the related parties whi...