Concept and Implementation of CFC Legislation

S. 4581. Introduction

Within literature on controlled foreign corporations (CFC), it has been largely discussed i) whether or not the CFC rules could work as a backstop to transfer pricing rules in cases in which transfer pricing rules had been manipulated leading to base erosion and profit shifting; 2) whether or not CFC rules would be really needed if transfer pricing was set correctly.

By reviewing the most frequently applied transfer pricing structures, this paper analyses i) whether or not CFC rules can really be a backstop for transfer pricing rules, ii) whether both of these two sets of rules are needed, and iii) whether applying both sets of rules could lead to double taxation.

2. Comparison between CFC and Transfer Pricing rules

This section aims to briefly compare both transfer pricing rules and CFC rules when applied individually.

2.1. Purposes of the rules

2.1.1. Transfer pricing and protection of a sourcing state

The transfer pricing scope is broad and involves all jurisdictions where multinational enterprises are active as long as they have transfer pricing rules.

The purposes of transfer pricing rules are the following:

• Reconciling the legitimate taxation rights of states in respec...