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Practice Area Overview
Tax matters are by definition bound to rules and regulations. Several tax areas, however, require skill sets beyond the knowledge of the applicable set of rules and regulations, and one of these skill sets is Economics. The interpretation of various tax rules and regulations often requires the quantification of what constitutes a reasonable measure of value for something that is being transferred, and such quantification is essentially based, together with the applicable tax rules and regulations, on economic and financial concepts.
A prime example of the application of economics on tax matters is transfer pricing, where the internationally accepted arm's length standard, developed by the Organization for Economic Cooperation and Development ("OECD"), dictates that the terms and conditions laid out in related-party dealings must be similar to those that would have been laid out between independent enterprises under comparable circumstances. Notwithstanding, the proper application of the arm's length standard requires certain economic and financial skills, there are specific areas within the wider context of tax and transfer pricing, and this is where the practice area of Economist is of particular relevance. Some of these particular areas are explained below.
- Valuations: transfers of "something of value" need to be quantified for tax and transfer pricing purposes, taking into account the relevant provisions of the OECD Transfer Pricing Guidelines as well as the respective jurisdictions' applicable rules and regulations. A combination is needed of generally accepted valuation techniques, which heavily rely on economics, as well as the nuances from a tax and transfer pricing point of view.
- Intangibles: transfers of intangibles have numerous special considerations, as addressed by OECD Transfer Pricing Guidelines' Chapter VI and Action Item 8 of its BEPS Plan. The application of complex profit split methods, and of concepts such as useful life, market characteristics, discounts rates, etc., again require a strong dose of economic concepts.
- Corporate restructurings: among various aspects to be considered from a tax point of view in business restructurings is a sound analysis of the applicable enterprise's value chain in order to determine where the main profit drivers lie, and how these have and will be managed in the restructured enterprise in order to conclude whether "something of value" has been transferred and what the proper remuneration levels are for the various modules within the value chain.
Practitioners in this area generally provide services to multinational enterprises that require assistance in developing sustainable tax and transfer pricing positions in the various tax jurisdictions where they operate. Economists will most likely be called upon for complex inter-company dealings, such as those described in the above examples.
Practitioners generally have experience in the applicable set of tax and transfer pricing rules and regulations and specialized knowledge in economics, finance, and accounting.
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