Speaking at an international tax conference co-sponsored by Baker & McKenzie and Bloomberg, Mike Williams, HMRC’s director of business and international tax, described himself as a ‘critical friend of transfer pricing’, saying the central tenet ‘is that profits belong where the economic activity generating them is located. ‘However, he said this was difficult to achieve in practice as there was ‘no perfect way to divvy up the profits across all sectors’, and cast doubt on options such as formulary apportionment or the imposition of a minimum rate of tax globally.

Instead, Williams said the OECD must update its transfer pricing guidelines to keep pace with the way businesses operate in the modern economy.

‘Everyone talks about the arm's-length principle, but it is no more than a means to an end. It is a way of dividing up profits between countries. If countries were to decide there were a more sensible way to divide up profits, then people would want to change to something else,’ he said.

.Williams identified one of the principal weaknesses of transfer pricing as the way in which the transfer of intangibles is treated which, he said, can deliver ‘some pretty indefensible outcomes, particularly where tax havens are involved.’

‘You can have a circumstance where a group has a spare billion dollars and it uses that capital to fund a tax haven entity. As a result of its choice, a lot of the capital will then lie in the tax haven entity and that may change the division of the profits between entities in the group. Is that defensible? Again, you can see why that is an issue that we needed to look at as part of BEPS project,’ Williams said.

Williams also said that while controlled foreign company (CFC) rules are important, clear transfer pricing rules are the more critical factor in tackling tax avoidance.

‘It is more likely to get you to a level playing field. If what you are trying to do is tax profits related to economic activity in your territory, you are better off trying to do that directly through the transfer pricing rules than waiting until those profits move to a tax haven entity, into a CFC, then grabbing them back,’ he said.

At the conclusion of his speech at the conference, Williams said that while he welcomed the BEPS project and attempts to introduce regulations to ensure that outcomes be determined in accordance with the actual conduct of the parties, it was ‘ slightly worrying and slightly hard to explain’ how it had become necessary to reaffirm this.