Tax Justice Network ■ Getting the short end of the stick again and again


Guest blog author: Cassandra Vet, Teaching Assistant and PhD Candidate, Global Governance and Inclusive Development, Institute of Development Policy, University of Antwerp

Now the reform to curb corporate tax avoidance gets up to speed with the outdated principles of corporate taxation, it seems that developing countries are left with a disproportionately small share of these recaptured taxes. Previously, Martin Hearson warned tax avoidance scholars about the uneven distribution of benefits of institutionalized tax avoidance solutions.[1] Unequal power relations between capital-importing and capital-exporting countries shaped international tax institutions in the past and will do so in the present. And indeed, while the global project on Base Erosion and Profit Shifting (BEPS) publishes some of its most comprehensive work to change the tax regime, tax justice advocates point out that developing countries only benefit marginally from these fixes.[2]

Policy reforms are an inevitable tug-of-war between interests, settled within uneven power relations. One of these uneven power resources are the ideas and paradigms policymakers use to give meaning to their actions. For instance, market-based norms guided the reform of how corporations and revenue authorities should calculate the amount of profit transnational corporations make within a specific country. As a result, these policymakers copied uneven power in the world economy to the international tax regime.[3]

Let me clarify, transfer pricing is the technique used by corporations to separate their global activities in different tax jurisdictions. Transfer pricing literally divides international corporate wealth into national tax baskets by pricing crossborder interactions within a transnational corporations. And while tax advisors prefer to maintain their discretion in coming up with these prices, states also struggle amongst themselves over the governance of these prices as each state has an interest to book as much profits as possible within their tax jurisdiction.[4]

The OECD transfer pricing guidelines are the norms that describe how to decide on an appropriate method to calculate a transfer price. In general, these norms follow the arm’s length principle that introduces market prices as a benchmark to price non-market interactions between related parties. This approach kept residual profits outside of tax administrations’ reach.[5] So, when the G20 endorsed the OECD to fix the loopholes in the tax regime, an update of the transfer pricing guidelines was inevitable.

One of these reforms is the extended use of the transactional profit split method. In contrast to most methods, the transactional profit split method does account for residual profits. Therefore, this reform held two distributive conflicts, one between private and public authority over the recognition of residual profits, and another over the division of these residual profits along the global value chain.

The public-private struggle was settled in favor of public authority. Private authority argued that as non-related parties rarely use this method to set a price on their transaction, neither should affiliated parties within a transnational corporations.[6] Otherwise, this would not be at arm’s length. Nonetheless, the policy-makers explicitly rejected this discourse and loosened the analogy between intra-group planning and market relations.[7]

Yet, this analogy remained in place when private and public authority decided on the value chain contributions that share in the residual profits. They agreed that the division is “economically valid” when it resembles the division of synergy profits within non-integrated value chains.[8] The application of the transactional profit split method is then appropriate among parties that carry risks, make strategic decisions and unique, valuable contributions. They located the residual profits at the company’s headquarters and higher value chain functions, but not at the manufacturing hubs or mining sites – the branches that make simple, and routine value chain contributions.  

Under this logic, developing countries only receive a marginal share of the residual profits. The stakeholders legitimised this division in comparison with price-setting logics in the real world economy. Namely, the marginal share resembles the amount of synergy profits that lead firms share with non-related manufacturing hubs or mining sites in developing countries. But is this legitimate? And what does this say about the underlying theory of value creation?

Dominant discourses feel natural, structure our thoughts and remain implicit along with the power relations they support. The dominant discourse of value creation within BEPS circles frames value creation as price determined money flows.[9] An alternative is a horizontal theory of value creation that starts from the “raw materials to the point of consumption, with ‘value added’ arising at each node along the chain”.[10] However, all participants neglected this interpretation despite its potential to support a more equitable distribution of the global tax base.

Instead, the discussions supported the view of value creation as global patterns of extracting surplus value through chains of capital ownership. Thus, the discourse of market comparability, or the arm’s length doctrine, supports a division of transnational corporations’ profits over different tax jurisdictions that reflect the uneven market power within the world economy. The inappropriateness of sharing residual profits with those making simple and routine contributions should then be read in relation to the limited bargaining power of such branches in the world economy. But is it legitimate to share a transnational corporation’s tax base unevenly between countries just because the market place also does so?  Questions on the distribution of wealth, or recaptured wealth, in international taxation deserve a political debate. But as long as the underlying theory of value creation remains hidden and uncontested, chances are developing countries will keep getting the short end of the stick.

Download the original working paper here.

The Tax Justice Network recently held a virtual conference bringing together experts from around the world and speakers from the OECD, G24, IMF, World Bank and ICRICT to share analyses of current proposals on reforming the international tax system. You can re-watch the conference and view all slides and shared papers here.

[1] M. Hearson, ‘The Challenges for Developing Countries in International Tax Justice’, Journal of Development Studies, vol. 54, no. 10, 54(10), 2018, p. 1936.

[2] V. Grondona, ‘The Dangers if the Residual Profit Split’, Tax Justice Network [weblog], 3 October 2019,, (accessed 4 October 2019). A., Cobham, T. Faccio, and V. FitzGerals, ‘Global Inequalities in Taxing Rights: An Early Evaluation of the OECD Tax Reform Proposals’, SoCarXiv, 2019,, (accessed 7 November 2019). T. Ryding, ‘Eurodad response to OECD consultation on international tax rules’, EURODAD [Weblog], 14 November 2019,, (accessed 19 November 2019).

[3] C. Quentin and L. Campling, ‘Global inequality chains: integrating mechanisms of value distribution into analyses of global production’, Global Networks-A Journal of Transnational Affairs, vol. 18, 2018, p. 51.

[4] L. Lips, ‘Great powers in global tax governance: a comparison of the US role in the CRS and BEPS’, Globalizations, vol. 16, no. 1, 2019, 16(1), p. 106.

[5] M. Ylonen and T. Teivainen, ‘Politics of Intra-firm Trade: Corporate Price Planning and the Double Role of the Arm’s Length Principle’, New Political Economy, vol. 23, no. 4, 2018, p. 442-446.

[6] OECD, ‘Public Consultation: Revised Guidance on Profit Splits – First Session ‘, Working Party 6, 10 October 2016, (accessed 5 August 2019). OECD, ‘Public Consultation: Revised Guidance on Profit Splits – Second Session ‘, Working Party 6, 10 October 2016, (accessed 5 August 2019). OECD, ‘Public Consultation: Revised Guidance on Profit Splits – First Session ‘, Working Party 6, 6 November 2017, (accessed 5 August 2019). OECD, ‘Public Consultation: Revised Guidance on Profit Splits – Second Session ‘, Working Party 6, 6 November 2017, (accessed 5 August 2019).

[7] OECD, ‘Revised Guidance on the Application of the Transactional Profit Split Method: Inclusive Framework on BEPS: Action 10’, OECD, (accessed 5 August 2019).

[8] OECD, ‘Public Consultation’, 2016, 2017.

[9] Quentin and Campling, ‘Global inequality chains’, p. 50-51.

[10] Quentin and Campling, ‘Global inequality chains’, p. 47.

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