Skip to content
Accessible Published by De Gruyter April 7, 2017

Breaking Regime Stability? The Politicization of Expertise in the OECD/G20 Process on BEPS and the Potential Transformation of International Taxation

Tim Büttner and Matthias Thiemann

Abstract

As a response to widely reported corporate tax avoidance, the OECD/G20 Base Erosion and Profit Shifting process has relied on modifying the Transfer Pricing Guidelines in order to align taxation with economic substance, a form of incremental rather than radical change. We interpret this strategy of the OECD as an attempt to prevent a loss of authority without a politically risky complete overhaul. However, given the imperfect reconciliation – or even incompatibility – with persisting principles of international tax law, the incremental changes add to the complexity and incoherence of the guidelines on transfer pricing, leading us to expect an increase in conflicting assessments and uncertainty in the near future. Identifying a diminishing capacity of expert networks to achieve consensus on matters with strong distributional consequences, we argue that the incoherence of the system contains the seeds of its own transformation. However, due to vested interests in the current system and the reinforced capacity of the OECD to intervene in public discourses, we expect this transformation to be procedural and marked by conflicts over the meaning of the current guidelines, notably with regards to the arm’s length principle and the measurement of value creation.

Table of contents

1. Introduction

2. Persistence and incremental change of the international tax system

3. Theory

 3.1 The authority of technical organizations in the transnational realm

 3.2 The role of technical organisations for incremental change

4. Establishment of the process and maintenance of authority

 4.1 Proactive role of the OECD in response to the crisis

 4.2 The institutionalization of the BEPS process

 4.3 Organizational dynamics of the BEPS process

5. The reforms on transfer pricing of intangibles

 5.1 Limiting the width of reform

 5.2 Proposed treatment of intangibles

 5.3 Incoherence and indeterminacy of the outcomes

 5.4 Incremental change as source of incoherence

 5.5 Politicized expert discourses as reason for incoherence and indeterminacy

6. Assessment of the incremental reforms and conclusion

A Symposium on International Tax Avoidance

  1. Reuven Avi-Yonah (2017) ‘International Tax Avoidance – Introduction’, Accounting, Economics and Law: A Convivium, DOI https://doi.org/10.1515/ael-2016-0071.

  2. Yuri Biondi (2017) ‘The Firm as an Enterprise Entity and the Tax Avoidance Conundrum: Perspectives from Accounting Theory and Policy’, Accounting, Economics and Law: A Convivium, DOI https://doi.org/10.1515/ael-2017-0001.

  3. Tim Büttner and Matthias Thiemann (2017) ‘Breaking Regime Stability? The Politicization of Expertise in the OECD/G20 Process on BEPS and the Potential Transformation of International Taxation’, Accounting, Economics and Law: A Convivium, DOI https://doi.org/10.1515/ael-2016-0069.

  4. David Quentin (2017) ‘Corporate Tax Reform and “Value Creation”: Towards Unfettered Diagonal Re-allocation across the Global Inequality Chain’, Accounting, Economics and Law: A Convivium, DOI https://doi.org/10.1515/ael-2016-0020.

  5. Błażej Kuźniacki (2017) ‘Tax Avoidance through Controlled Foreign Companies under European Union Law with Specific Reference to Poland’, Accounting, Economics and Law: A Convivium, DOI https://doi.org/10.1515/ael-2015-0018.

  6. Reuven S. Avi-Yonah and Amir Pichhadze (2017) ‘GAARs and the Nexus between Statutory Interpretation and Legislative Drafting: Lessons for the U.S. from Canada’, Accounting, Economics and Law: A Convivium, DOI https://doi.org/10.1515/ael-2015-0019.

1 Introduction

Tax avoidance of large transnational corporations has gained political salience since 2011 due to media exposure of tax planning schemes of single transnational corporations (Starbucks, Google, IKEA, Amazon, Apple), public parliamentary hearings and increased involvement of the civil society, led by the Tax Justice Network (Christians, 2013: 637; Eccleston & Smith, 2016: 180; Seabrooke & Wigan, 2016: 358). Governments increasingly pressured to cut budgets were less willing to tolerate huge revenue losses due to base erosion and profit shifting (in the following abbreviated BEPS; Sheppard 2014: 65), estimated between 4–10 % of the global corporate income tax revenues (OECD 2015c: 4). On a technical level, much academic critique has been directed against the OECD transfer pricing system, allocating profits of transnational corporations based on the arm’s length principle (Avi-Yonah 2016: 291; Durst, 2010: 248; Kleinbard 2011b: 148; Sheppard 2012: 471). The current rules, counterfactually assuming highly integrated enterprises to be composed by separate entities, have allowed in many cases to shift income earned in high-tax jurisdictions to low-tax jurisdictions, e. g. as intra-group fees for the use of intangibles, leading to under-taxation or even double non-taxation (Heckemeyer & Overesch, 2012: 3; OECD 2013a: 42). Civil society organizations and academics have called for a fundamental reform, declaring that any attempt to fix the international tax system relying on the arm’s length principle is bound to have limited effects (Spencer & McNair, 2012: 3; Tax Justice Network 2016).

As a response, the Organisation for Economic Co-operation and Development (OECD) has led a reform process to curtail practices of Base Erosion and Profit Shifting (BEPS) by TNCs from 2013 onwards. On the 5th of October 2015, when it issued the final reports on these measures, the OECD announced them as the “most fundamental changes to international tax rules in almost a century” (OECD 2015f). [1] As the secretary-general of the OECD, Angel Gurriá, stated, the measures concluded “will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective” (ibid). The OECD thereby reacted to the enormous institutional pressure in consequence of a crisis of the international tax regime. As the OECD itself agreed, the international standards promoted by the OECD enable corporate tax avoidance (OECD 2013a: 39–46; Sheppard 2014: 63–64).

Despite the fundamental critique of academics and NGOs, the main instruments proposed by the final reports remain largely the same as before the reform: bilateral tax treaties to distribute taxation rights between countries, an extensive and complex system of transfer pricing and unilateral anti-avoidance measures (OECD 2015c: 6–9). In this work, we focus on the reform on transfer pricing of intangibles, which is one of the main drivers of BEPS (OECD 2013a: 6). Instead of a more radical change, e. g. towards a system of unitary taxation and formulary apportionment (Avi-Yonah 2016: 289), the BEPS process has relied on incrementally modifying the current measures to respond to the most frequent techniques of corporate tax planning by giving more relevance to economic substance.

This raises challenging questions: how can we make sense of the way incremental rather than radical change has occurred as a response to the wide-spread crisis? And, possibly more important, what does this incremental change mean for the future of the international tax regime? Our ambition in this article parallels a series of studies trying to understand the dynamics of incremental change (see notably the studies in Moschella & Tsingou, 2013). In line with this work, we raise the all-the-more important question of whether the incremental changes contain the potential for more fundamental reform in the long run or if they are merely a regime-preserving strategy without further consequences.

In order to answer this question, we conducted six semi-structured interviews with selected experts of the OECD, the German Finance Ministry (BMF), a large accountancy firm, specialized journalism, and a civil society organization (see appendix for full list). While evidently not exhaustive, this allowed us to interview representatives from each of the important stakeholders in this debate. Additionally, we conducted a qualitative content analysis of several OECD reports and discussion drafts, government reports, official statements of OECD and G20 and important representatives and specialized press.

Specifically, we ask what role economic substance plays in the current and potential future reform processes on transfer pricing of intangibles. Combining rationalist Historical Institutionalist explanations with social constructivist approaches, we argue that economic substance plays a double role in the reform process due to its capacity to link public and technical discourses. Emerging out of a social learning process responding to the problem of BEPS, we interpret the ambition of the OECD to align taxation with economic substance (OECD 2013b: 11) as an attempt to prevent a loss of authority without a politically risky complete overhaul of the current system. However, given the imperfect reconciliation – or even incompatibility – with persisting principles of international tax law, the incremental changes add to the complexity and incoherence of the Transfer Pricing Guidelines, which leads us to expect conflicting assessments and on a case by case basis double or under-taxation in the near future. [2] We link this to the politicization of expert discourse and the diminishing capacity of the OECD to achieve consensus on matters with strong distributional consequences. Agreeing with Seabrooke and Wigan (2016: 370) that expertise can be a motor of change in international taxation, we argue that the incoherence of the system contains the seeds of its own transformation,

In order to make this case, the paper proceeds as follows. Section 2 seeks to explain the persistence of the current system of international taxation by tracing its historical development, highlighting the role of the OECD in mitigating distributional conflicts. Section 3 establishes our theoretical framework by reviewing literature on how technical organizations as the OECD succeed to maintain their authority in transnational governance. The empirical part traces the institutionalization of the process in section 4 and the discussion on transfer pricing of intangibles in section 5. Section 6 concludes by assessing the incremental changes with regards to mid-term stability of the international tax system.

2 Persistence and incremental change of the international tax system

There are only few studies trying to explain the persistence of the international tax regime directly, as scholars of international political economy have so far focused much more on the issue of tax competition (Dietsch & Rixen, 2016: 4; Rixen 2011: 198). The international tax regime is a network of bilateral tax treaties which are for the largest part based on the OECD Model Tax Convention (Genschel & Rixen, 2015: 162). Changes to the bilateral treaties often translate directly into national law, resulting in far less compliance issues than in other areas of international law (Grinberg 2016a: 1179). The international tax regime emerged in the 1920s under the auspices of the League of Nations as a response to the problem of trade restricting and welfare-reducing double taxation (Radaelli 1998: 604; Rixen 2011: 198). The object of this study, the problem of under-taxation which arises out of international tax regime, has been neglected until the 1960s due to low levels of internationalisation and the high risk of double taxation (Rixen 2011: 210).

The OECD Model is based on the assumption that the different parts of a Transnational Corporation (in the following TNC) are separate legal entities and therefore seeks to establish a record of intra-firm payments (transfer pricing). [3] The arm’s length principle has been established as the common standard in transfer pricing, devised as the guiding principle by Article 9 of the OECD Model Convention. [4] The rationale behind the arm’s length principle is to compare the contracts concluded between subsidiaries to contracts made between independent parties on markets of reference (OECD 2010: 32). The Transfer Pricing Guidelines devises methods to establish comparable, observable prices that have been (or would have been) paid for the transaction within a TNC.

Soft law in the form of model treaties and guidelines has exerted remarkable strength in this area (Rixen 2011: 220), allowing the OECD as a pivotal transnational actor to influence the direction of international taxation since the 1950s (Radaelli 1998). [5] This strength of soft law can be explained notably by the highly de-politicized institutional context of low political salience in which it was applied (Grinberg 2016a: 1160; Grinberg & Pauwelyn, 2015; Picciotto, 2015: 179). Although significant dissent among the group of specialized experts existed, the diverging views were placed within a comparably narrow area, recognising intercompany contracts and the allocation of risk within multinational companies (Genschel & Rixen, 2015: 163, 179, Grinberg 2016a: 1160). [6] Separate entity accounting on the basis of the arm’s length principle can mitigate conflict and thus depoliticize the distribution of taxation (Picciotto 1992: 172; Rixen 2011: 212) by converting the larger distributional problem to a case-by-case application of the arm’s length principle (Picciotto 2015: 174). Taking note of the OECD in producing a technocratic consensus on distributional conflicts, we highlight the pivotal role the OECD has played in stabilizing the international tax regime.

From a rationalist point of view, we can add as a reason for institutional stability the strong interests of Western states in maintaining the international tax regime (Rixen 2011: 217). While all states have a common interest in solving the problem of double taxation and even have exempted over-taxed income unilaterally, the historical compromise which strongly limited source taxation rights largely favoured mostly Western capital-exporters (Genschel & Rixen, 2015: 162). When the problem of under-taxation arose as a result to the international tax regime, they chose to convert the existing rules to incorporate the most obvious abuses in a first phase from the 1960s to the 1990s, and to layer new legal instruments on the existing double tax treaties from the 1990s onwards – thus circumventing an entire revision of the principles of international taxation (ibid: 170).

There are strong rationalist arguments favouring institutional stability, notably power asymmetries which allowed the monopolization of rule-setting by Western net capital-exporters within the OECD (Genschel & Rixen, 2015: 162), and network externalities which de-incentivized defection from the OECD standard individually (Radaelli 1998: 607). [7] While we support these explanations, we think what warrants closer attention is Rixen’s assertion of stability in the core principles, limiting change to peripheral, incremental adaptations (Rixen 2011: 216). There are strong indications that the unanimous support of the arm’s length principle and the assumption of separate entities by OECD members masks fundamental disagreement among expert groups and ambiguity regarding the correct application (Picciotto 2015: 179–180; Rixen 2011: 214). [8] An indeterminate agreement on the application of the guidelines, however, has potentially detrimental effects on the sustainability of the international consensus, because it risks that de-politicized distributional conflicts come up to the surface. Given that the stability of the international tax regime crucially depends on a uniform application of the guidelines by relevant stakeholders, we pay close attention to the capacity of the OECD to produce a technocratic consensus within the expert community. To this purpose, we draw on Historical Institutionalism and the literature on expert networks in order to explain the role of the OECD in transnational governance.

3 Theory

3.1 The authority of technical organizations in the transnational realm

In order to better understand reform processes in the international tax regime, we analyse the crisis of the international tax regime as a threat to the authority of the OECD. International organizations as the OECD do not dispose of the traditional sources of (input-)legitimacy of nation state organizations to secure their authority (Zürn, Binder & Ecker-Ehrhardt, 2012: 70) and must legitimize their actions as appropriate and justified in order to secure their authority (Wood 2015a: 1015). In order to maintain their favorable institutional position within the transnational governance network, the OECD needs to obtain and preserve both epistemic and governance authority (Quack, 2016: 363). While the first relates to its reputation as a technical organizations with outstanding resources of expertise, the latter relates to its role in organizing technocratic processes of rule making and implementation (Eccleston, 2011: 243; Lesage & Van de Graaf, 2013: 84).

The epistemic authority of institutions is grounded in social learning, which is the capacity to update rationally and effectively “the goals or techniques of policy in response to past experience and new information” (Hall 1993: 278). The OECD possesses a highly specialized bureaucracy, the Centre for Tax Policy and Administration (CTPA), capable of evaluating developments in international taxation and the institutional environment and to adapt accordingly. This gives them the possibility to observe crises pre-cautiously and to circumvent them strategically (Carstensen 2011: 161; Streeck & Thelen, 2005: 14; Wilder & Howlett, 2014: 189), e. g. by modest changes to existing settings (Oliver & Pemberton, 2004: 427, Wilder & Howlett, 2014: 189).

With regards to governance authority, we have highlighted in the previous section the capacity of the OECD to pacify distributional conflicts by transforming them into a technocratic process. We further emphasize the role of the OECD in interpreting the crisis of the international tax regime. As Widmaier, Blyth, and Seabrooke (2007: 749) show, moments of crises are not exogenously interfering events, but constructed endogenously by strategically operating policy-makers (Widmaier, Blyth & Seabrooke, 2007: 749), making them object of political struggle by expert networks (Wilder & Howlett, 2014: 192). The high political pressure on political leaders to act in moments of crisis represent also chances for international organizations to advance their agendas (Eccleston, Kellow & Carroll, 2015: 304–305). In order to influence the dynamics of a crisis, transnational experts can engage in strategies of (de-)politicization, defined as “the rhetorical recognition or denial by humans of their capacity to alter their collective practices, institutions and social conditions” (Wood 2015b: 10).

3.2 The role of technical organisations for incremental change

As the literature on epistemic communities and expert networks suggests, institutionalized forms of expertise grant specific advantages to promote a certain vision of reality and to influence reform processes (Wilder & Howlett, 2014: 189). In order to understand the persuasive power of expertise, one has to acknowledge that “expertise is not simply a claim to superior knowledge about how things work, but also a claim about how things should be, which relies on moral authority” (Blyth 2007: 762; Seabrooke & Wigan, 2016: 360; compare also). Due to their influence in controlling and mediating the streams of knowledge (Seabrooke & Wigan, 2016: 360), expert groups can influence the possibilities of reform strongly (Eccleston, Kellow & Carroll, 2015: 305, Porter 2003: 524). The literature often finds reform-restraining properties of institutions (Bell 2011: 884; Blyth 1997: 230; Pierson 2000: 493), e. g. due to a bureaucratic culture (Clegg, 2012: 291; Babb 2013: 289; Moschella 2015: 447). This can explain why incremental rather than radical reforms occur even in moments of crisis (Baker 2013: 133; Moschella & Tsingou, 2013: 203).

In order to avoid a complete overhaul, different patterns of incremental change have been identified, notably the layering of new structures on existing ones, conversion of the original purpose of an arrangement without modifying the original structure and drift (Streeck & Thelen, 2005: 22–29; Thelen 2003: 226–230). Incremental change has often been equated to institutional stability, with symbolic adaptions or mock compliance as frequent strategies to prevent more radical change after an external shock (Lindblom, 1959; Moschella & Tsingou, 2013: 5; Rixen 2013: 436). Against this assessment, scholars have advanced the argument that substantial, but incremental change can occur endogenously, suggesting that change is often accumulative and procedural (Baker 2013: 129; Moschella & Tsingou, 2013: 4; Streeck & Thelen, 2005: 2). Assuming a dynamic interdependence between agents and institutions (Bell 2011: 898; Moschella & Tsingou, 2013: 12) can explain why institutions gradually change over time due to the agency of political actors (Mahoney & Thelen, 2010: 1). Under some conditions, expertise and technical organizations can be a driving and innovative factor of policy change (Bell 2011: 894; Eccleston & Woodward, 2013: 2–3; Moschella 2015: 447; Seabrooke & Wigan, 2016: 359), especially when actors have sufficient space to interpret existing rules and institutions independently.

Mahoney and Thelen (2010: 10) identify compliance with rules as a variable that can bring about endogenous change. Even the most formal institutions inherit a degree of ambiguity and rule imprecision, allowing actors to interpret and implement the rules in a manner favorable to their interests. As we will discuss with regards to transfer pricing, the incremental change leading to the consideration of the actual economic conduct of entities opens large spaces of interpretation. This may lead to substantial institutional change which “occurs precisely when problems of rule interpretation and enforcement open up space for actors to implement existing rules in new ways” (Mahoney & Thelen, 2010: 11). To the extent that it changes the dynamics of elaboration and interpretation of rules, we argue that the politicization of expert discourses is an important factor explaining when and why institutions change endogenously, leading to incremental, but substantial change. In section 5, we will discuss this with regards to the discussion on transfer pricing of intangibles. Before we come to that point, we will discuss the institutionalization of the process within the politicized crisis environment.

4 Establishment of the process and maintenance of authority

4.1 Proactive role of the OECD in response to the crisis

Although driven by the enormous institutional pressure due to crisis of the international tax system (Sheppard 2014: 63–64) and the changing global power equilibrium shifting towards the G20 and away from the traditional OECD membership (Clifton & Díaz-Fuentes, 2015: 21; Lesage & Van de Graaf, 2013: 83), the OECD acted as a proactive player in the institutionalization of the process. [9] Strongly backed by important governments, the enlargement of the G20 tax agenda to include the problem of tax planning must be attributed to the OECD and, notably, the head of its Centre for Tax Policy and Administration (CTPA), Pascal Saint-Amans (CSE interview; Eccleston & Smith, 2016: 181). [10] Building on the strengthened institutional links between the OECD and G20 due to the previous campaign on tax transparency, the more ambitious BEPS project could build on these capacities (Eccleston & Smith, 2016: 178).

In addition to drawing extensively on its close relations to the G8 and increasingly to the G20, the OECD has also proven to be innovative in framing the problem in a manner that allowed both responding to the external pressure and to the diverging interests among national states. The main argument put forward in the two reports issued in 2013 (OECD 2013a, 2013b) is that a once functional tax system has not kept up with the changing economic environment and the extent of economic integration, especially concerning the challenges set out by the digital economy and the rising importance of intellectual property. Focusing on new business models, the OECD relates the problem of BEPS to “tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid” (OECD 2015d: 27). The OECD warned ceaselessly of the detrimental effects of unilateral action, notably double taxation (OECD 2013b: 11, 2012: 3), and called for a concerted multilateral coordination (OECD 2013a: 51).

Especially in contrast to the previous OECD-campaign on harmful tax measures (OECD 1998), which has targeted states deflecting from international norms by aggressive tax strategies directly, it becomes clear that the problem definition put forward here is strangely apolitical. [11] It neglects notably the role of nation states (and very importantly some of the OECD member states) intentionally undermining the international consensus or using its low institutionalization to their advantage (Dharmapala 2014: 2). There is some irony in representing tax planning strategies of TNC and its adverse effects on corporate tax bases as unintended by domestic policy (OECD 2013a: 45) when we contrast it with the aggressive claims of its member states to increase the competitiveness of their tax systems. Commentators have notably pointed to the example of the UK, which has openly endorsed the BEPS project while at the same time promoting its national strategy to create Europe’s most competitive tax system by introducing the controversial patent box regime and various exemptions into domestic tax law (Devereux & Vella, 2014: 452; Herzfeld, 2015; Stewart, 2014: 494).

Herzfeld (2015) has argued that the focus on BEPS suggests the existence of currently untaxed income that can be distributed among member states. Aligning the interest of all G20 states in a fight against BEPS, the OECD suggests that distributional conflicts can be overcome by focusing on income claimed by no state (“stateless income”; see Kleinbard 2011a; 2011b) that can just be “brought home”. The inconsistency between different tax systems put forward here has the great advantage that it suggests more co-operative solutions to the problem (Grinberg & Pauwelyn, 2015). Importantly, a direct attack on the sovereignty of national tax policy, unsuccessful in the previous campaign (Genschel & Rixen, 2015: 174; Palan et al. 2010: 214; Sharman 2006: 143; Webb 2004: 790), can be excluded from the agenda. The OECD makes clear that the BEPS process aims to restore sovereign taxation rights rather than restricting them as many deem necessary to curb tax competition (OECD 2013b: 10; see also; OECD 2015d: 28). Social learning within the OECD as a result to the failure of the previous campaign might thus be one explanation for the shifted problem definition. A second aspect of social learning can be observed when the concept of economic substance is introduced in order to address the problems defined within this limited reform agenda.

4.2 The institutionalization of the BEPS process

The OECD Action Plan proposed measures increasing transparency, coherence of domestic tax systems and restoring “the full effects and benefits of international standards” by realigning “taxation and relevant substance” (OECD 2013b: 13). [12] This is in line with the Tax Annex of the St Petersburg Declaration of the G20 meeting in 2013, calling for tax rules to assure that “profits are taxed where economic activities occur and value is created” (G20 2013: 3). We interpret this strengthening of the role of economic substance in international taxation as a strategy of the OECD to strengthen both epistemic and governance authority. [13] While economic substance emerged out of a social learning processes to adapt the international tax system to the artificial separation of income and economic activity, the ambition to align taxation with value creation is also rhetorically persuasive within the heated institutional environment. There is a strong moral claim that the fairness rises and falls with the extent taxation corresponds to real economic performances, supporting corresponding ideas about appropriate systems for taxation of cross-border activities (Seabrooke & Wigan, 2016: 358). As we will discuss below, this rhetorical strategy allowed the OECD to respond to the criticism directed against it while evading to commit a complete overhaul of the current system.

Against the background of the crisis and institutional pressure to adapt to the changing institutional environment, this helped the OECD to use its favorable institutional position to present itself as the best-suited forum to develop comprehensive responses to satisfy the public attention in a sufficient manner. The endorsement of the BEPS Action Plan (OECD 2013b) at the G20 summit of the heads of government in St. Petersburg in September 2013 (G20 2013: 2–3) has reinstalled the authority of the OECD in guiding the reform process (Lesage 2014: 33; Lesage & Van de Graaf, 2013: 84), served to integrate the emerging countries within the OECD network (Sheppard 2014: 64), and has reinforced the tax agenda of the OECD with the political power of the G20 (Eccleston, Kellow & Carroll, 2015: 299; Kirton 2013). [14] This affirms the argument that moments of crisis represent both chances and risks for both G20 and OECD, opening windows of opportunity for institutions to adapt the institutional resources to the new situation and to overcome otherwise rigid cleavages (Eccleston, Kellow & Carroll, 2015: 305).

4.3 Organizational dynamics of the BEPS process

The endorsement of the G20 allowed the OECD in the following to establish a reform process with specific institutional features, which effectively influence the possibilities of reform (Grinberg & Pauwelyn, 2015). Firstly, all decisions are finally taken unanimously by the Committee on Fiscal Affairs (CFA) as the intergovernmental decision-making body, comprised of leading national regulators (Ault 2009: 760) and enlarged for the purpose of the BEPS project to include members of the G20 without membership in the OECD on an equal footing (OECD 2013b: 25). While this enlarged membership has contributed to the legitimacy of the BEPS process (Lesage 2014: 33–34), it made the finding of consensus more difficult as the OECD had to ensure the endorsement of the participating government of emerging countries with significantly different interests (AFE interview). [15] Secondly, a larger community of experts from business, union and civil society has participated directly or indirectly in the elaboration of technical proposals, notably through the Business and Industry Advisory Committee (BIAC) and the Trade Union Advisory Committee (TUAC). The process has been accompanied by significant coverage in specialized medias and from business, union and civil society groups (Grinberg 2016a: 1160).

Thirdly, there is a shift from bottom-up processes historically to be found in international tax law reforms to more top-down processes with agenda-setting on a higher level, paralleling reform processes in international financial law after the Global Financial Crisis (Grinberg 2016a: 1147; Seabrooke & Tsingou, 2014: 405). Given the need for immediate action due to the increased political pressure and the leadership role taken by the G20, the OECD had envisioned an extremely ambitious timetable, proposing comprehensive revisions of the international tax system in only two years, extremely short compared to other OECD campaigns (OECD interview; Grinberg 2016a: 1147–1148). Focus groups of only a small number of delegates set up to ensure an efficient process and steady and rapid work to find consensus (OECD 2013a: 26). In contrast to the usual bottom-up processes within the CFA, starting with a widely shared standard and peer-reviews, introducing increasingly more demanding features throughout the process (Pal 2012: 138–139), the agenda setting of the BEPS project has occurred on a higher-level from the start on (Grinberg 2016a: 1147). This reflects the political backing of the G20 and the personal involvement of high-level elected officials, and suggests that processes of politicization after a crisis can change even stabilized patterns of social learning within reform groups (Grinberg 2016a: 1152).

Fourthly, the soft law that has been produced as outcomes leaves much of the effectiveness of the process depending on implementation and enforcement of the agreements (Grinberg 2016a: 1152). Politically, this may reflect that the OECD has anticipated that the G20 will more easily be persuaded to endorse processes based on low commitments (Grinberg 2016a: 1151). It can nevertheless be expected that the OECD carefully oversees the effectiveness of the G20/OECD agenda (Lesage 2014: 40) as the authority of the OECD depends strongly on the success of the standards and increased accountability in the implementation process (Eccleston & Woodward, 2013: 11; Lesage 2014: 40). Problems of compliance in this area are reduced by the legal status of the bilateral tax treaties and commentaries building on the OECD Model which has immediate restraining effects on participating countries (Grinberg 2016a: 1179).

While the OECD has managed to monopolize the reform process and to prevent a shift in the locus of authority, significant adaptations of the institutional framework have been undertaken. We identified notably the wider community of participating states and non-state actors, the dominance of top-down processes of policy making, and the central role attributed to economic substance. These factors that were necessary to secure endorsement of the G20 contribute to difficulties in finding consensus concerning the Transfer Pricing Guidelines, discussed in the next part. As we will argue then, this undermines the success of the reforms as the soft law that has been agreed as an outcome crucially needs consensus in order to be effective.

5 The reforms on transfer pricing of intangibles

5.1 Limiting the width of reform

The OECD has been very critical of the current practice of transfer pricing, identifying it as one of the pressure areas with urgent need for reform (OECD 2013b: 19). The under-valuation of intangibles, the over-capitalization of low-taxed entities and the contractual transfer of risks to low-tax affiliates are seen as the biggest problems in the transfer pricing area (OECD 2013b: 19–20). Conceding that “multinationals have been able to use and/or misapply those rules to separate income from the economic activities that produce that income and to shift it into low-tax environments” (OECD 2013b: 19), the purpose of these measures has been to “assure that TP [transfer pricing] outcomes are in line with value creation” (OECD 2013b: 20). The OECD has made clear from the beginning that it is not its ambition to fundamentally revise the underlying principles, notably the arm’s length principle, but “to directly address the flaws in the current system, in particular with respect to returns related to intangible assets, risk and over-capitalisation” (OECD 2013b: 20). To address these flaws, the OECD suggested an incremental adaptation of existing guidelines to ensure that transfer prices will not be manipulated to artificially segregate profits and economic activity by firstly, an adaptation of the arm’s length principle to economic substance requirements, and secondly, the introduction of special measures methods going beyond the arm’s length principle (OECD 2013b: 20). Special measures finally have not been included (OECD 2015b: 12) due to alleged significant progress with regards to the application of the arm’s length principle (OECD interview).

Political opposition from Western residence states of TNC can be considered as a central change-prohibiting factor (AFE interview). There are strong vested interests in the arm’s length principle as the guiding principle of the current system (Avi-Yonah & Xu, 2016: 24; CSE interview). It guarantees not only that Western states collect a disproportional share of tax revenues (AFE interview), but also assures the competitiveness of its domestically resident firms on global markets. [16] For example, US Congressional tax writers argue that a possible departure of the arm’s length principle is addressed primarily at strategies of American TNC and the Treasury Department has announced to resist such modifications (BEPS Monitoring Group 2015: 7; see also CSE interview; Ernick 2015: 5).

Limiting the width of reform, the OECD rejected notably unitary taxation and formulary apportionment (OECD 2013b: 20) advanced by parts of the academic community and civil society organizations on the grounds that it politically not feasible as it requires “development of an international consensus on a number of key issues” (OECD 2015d: 14). [17] Furthermore, doubts were raised that it constitutes indeed a more efficient tax system (OECD 2013b: 14). [18] While it is not explicitly the focus of our work to assess why unitary taxation and formulary apportionment has been rejected, we must add at this point that the position of the OECD that unitary taxation and formulary apportionment is politically not feasible and indeed not desirable is questionable. Scholars have argued there is a continuum of methods allowing a partial introduction (Avi-Yonah 2016: 301–303; CSE interview; Kofler 2013: 652; Li 2002: 844) and there are no scientific findings that a unitary approach bears more deficiencies than a separate entity approach (Avi-Yonah 2016: 43).

5.2 Proposed treatment of intangibles

Transfer pricing of intangibles plays a central role in the reform process due to its significant role in enabling corporate tax avoidance (OECD 2013a: 6). The OECD openly acknowledges that the current application of the arm’s length principle has difficulties to solve this problem, recognizing “that the identification of reliable comparables in many cases involving intangibles may be difficult or impossible” (OECD 2014: 76). Nevertheless, the overall direction of the final report on transfer pricing (OECD 2015b) was a strengthening of existing standards, including new guidance on the application of the arm’s length principle and appropriate pricing of hard-to-value intangibles reported to be within the arm’s length principle (Avi-Yonah & Xu, 2016: 40). [19] Consequently, the guidelines are criticized by proponents of more fundamental change for neglecting the fundamental problems of the concept of source, the artificial separation of entities of integrated multinational groups and the difficulties arising from applying the arm’s length principle in a context of highly integrated value chains and digitalized enterprises (Avi-Yonah & Xu, 2016: 23; BEPS Monitoring Group 2015: 1; Devereux & Vella, 2014: 461; Picciotto 2015: 178; Sheppard 2014: 66).

Differing from the older treatment of intangibles proposed in the revision of the Transfer Pricing Guidelines of 2010 relating strongly to intangible property, the new guidelines on intangibles detach the meaning for tax purposes of its contractual nature and accounting treatment and gives more relevance to its economic use. [20] Proposing a broadened definition of intangibles to discourage their transfer to tax havens (Sheppard 2014: 1110), intangibles are being identified as in the final report as

something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. Rather than focusing on accounting or legal definitions, the thrust of a transfer pricing analysis in a case involving intangibles should be the determination of the conditions that would be agreed upon between independent parties for a comparable transaction. (OECD 2015b: 67)

While the final report does not refrain from the process of identifying specific and distinct intangibles, their legal ownership and the transactions related to this asset, it draws attention to ensure that the attributed price is in line with value creation by determining the outcomes “in accordance with the actual conduct of related parties in the context of the contractual terms of the transaction” (OECD 2015c: 7). These are legally non-determined phrases, which have to be decided according to principle. In order to determine the value of intangibles, “functions performed, assets used, and risks assumed in the development, enhancement, maintenance, protection and exploitation of intangibles” (OECD 2015b: 63) should be taken into account. This leads to a decreasing importance of legal rights for transfer pricing purposes:

For intangibles, the guidance clarifies that legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the exploitation of the intangible. The group companies performing important functions, controlling economically significant risks and contributing assets, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate return reflecting the value of their contributions. (OECD 2015b: 10)

In order to attribute a price for intangibles, the OECD advices that “depending on the specific facts, any of the five OECD transfer pricing methods” may be useful, adding that “the use of other alternatives may also be appropriate” (OECD 2015b: 98). In other parts, the greater use of profit split methods in the case of intangibles is encouraged (Picciotto 2013: 1111). Indeed, compared to previous reservations, the reports are unusually clear in their summary concerning the use of the transactional profit split method, stating that profit split methods may be the potentially best suited method to reach the new goal of aligning taxation and value creation:

Nevertheless, the consultation process confirmed that transactional profit splits can offer a useful method which has the potential when properly applied, to align profits with value creation in accordance with the arm’s length principle and the most appropriate method, particularly in situations where the features of the transaction makes the application of other transfer pricing methodologies problematic. (OECD 2015b: 55)

Equally, the report on taxation of the digital economy (AP1), although not producing measures which will be implemented, proposes the profit split as a viable alternative to account for the increased integration of digitalized TNC (OECD 2015a: 87). However, the area of application of profit split methods remains strongly limited (CSE interview), discouraging its use for example when “the delineation of the actual transaction is such that a share of profits would be unlikely to represent an arm’s length outcome” (OECD 2015b: 59).

The focus on economic substance can be interpreted as the result of a social learning process responding to the artificial separation identified in the previous OECD reports, although it is to early to assess whether the changes will lead to a significant improvement to the problem of under taxation. Taking into account the role of shell companies and other economic entities, exercising little economic functions but serving as hubs to park profits in places where they are due to little or no taxes (OECD 2015c: 7), the measures limit at least to some degree the artificial separation of ownership and exploitation of intangibles (Gupta, Gupta: 988). In this vein, the proposed changes acknowledge and reinforce the fact that tax rules are interpreted in conversations between the regulator and the regulated (Black 1997: 38). In other areas of regulation, implementing diffuse requirements of economic substance into the law has proven to be an efficient way to ensure that rules are not transformed and circumvented by creative regulatees . However, it remains to be seen in the following years how successful this will be as substance requirements still can easily be circumvented by transferring important functions to low-tax countries, albeit with a higher amount of resources (Sheppard 2014: 71; CSE interview). Additionally, the circumstance that the once excluded profit split is now even considered to be superior, especially in cases where comparable prices (the original meaning of the arm’s length principle) are difficult to find, can be explained by the difficulties of the traditional transaction methods to allocate residual profits (Avi-Yonah 2016: 304–305). Within strict margins, injecting economic substance into the Transfer Pricing Guidelines and profit split methods might thus be well-designed measures remedying at least some of the greatest shortcomings of the current transfer pricing system.

5.3 Incoherence and indeterminacy of the outcomes

Isolating the problem of BEPS and advising locally targeted measures, however, leads to an outcome that is often described as somehow ambivalent and in parts contradictory and unnecessarily complex (BEPS Monitoring Group 2015: 7; Picciotto 2015: 179). Centrally, the BEPS project has been left without defining precisely how economic substance should be understood (AFE interview; SJ interview), leaving wide disagreement on how value-creation in relation to intangibles occurs among the stakeholders. This disagreement is paralleled by an apparent lack of consensus within the discipline of economics (for an extensive discussion, see Quentin this issue; Markham 2015: 679–680). There is, therefore, a fundamental ambiguity in the definition of the new principle guiding international taxation (Devereux & Vella, 2014: 468; Kofler 2013: 664), allowing a considerable range of interpretations (Silberztein 2015). This leads to pressure to find a common understanding of economic substance, as much of the methodology privileging substance over form necessitates interpretation how legal rights should be treated in the future (AFE interview).

The same incoherence and indeterminacy can be found with regards to profit split methods. One interviewee pointed to the problem that, as the OECD acknowledges the profit split only reluctantly, it is applied on an ad-hoc basis and remains under-systemized (CSE interview). Processes of social learning on the correct use of profit split methods seem to have been interrupted due to political circumstances, creating problems as the application might “degenerate into a down-and-dirty haggle between the MNE [MultiNational Enterprises] and the taxing authority over sharing the spoils” (Gupta, 2015: 989). Although now interpreted as being in line with the arm’s length principle and included in the five officially authorized OECD methods, many observers regard them as transcending the arm’s length principle by distributing the aggregated residual profits, thus undermining the separate entity approach by treating the two entities as unitary (Avi-Yonah 2016: 290; Gupta, Gupta: 989). [21] Consequently, most of those opting in favour of an introduction of methods of formulary apportionment have openly endorsed the increased importance of the profit split, as it can be considered a significant step towards more unitary methods (e. g. Avi-Yonah 2016: 304; CSE interview; BEPS Monitoring Group 2015: 7). Which regards to the profit split, Picciotto states that “an apparent consensus was maintained, by the insistence that all these methods comply with the arm’s length principle, and indeed this mantra continues to be repeated today, with a fervency that betrays a lack of confidence” (Picciotto 2015: 179–180).

The differing interpretations of economic substance, as well as the ambivalent status of profit split methods, suggest that the rhetoric stating the coherence of the arm’s length principle masks fundamental disagreement about the exact meaning of the arm’s length principle (Gupta 2014, September 22: 989). The claimed coherence of the international tax regime based on a few principles is marked by a strong complexity when it comes to details, necessitating a sophisticated functional analysis to determine the actual value of intangibles. The seemingly objective arm’s length principle has led to extensive additions to the Transfer Pricing Guidelines, paradoxically reinforcing the subjective nature of transfer pricing practice (Avi-Yonah & Xu, 2016: 41–42), leading often to negotiations between tax administrations and TNC to ultimately find a solution.

This critique of having created a patch-up approach stands thus in stark contrast to the rhetoric of the OECD, announcing a comprehensive treatment of tax planning schemes which addresses “their root causes rather than merely the symptoms” (OECD 2015c: 7). Politically, we may explain this rhetorical strategy of the OECD, defending the coherence and effectiveness of the reforms, by the enormous political pressure to reach a consensus that can be presented to the wider public (AFE interview). Although creative ambiguity, as Hugh Ault put it, may be in some circumstances useful,

masking important differences with bland platitudes is not helpful. […] if country A says the world is flat and country B says the world is round, and after a long discussion, the OECD issues a report that says the world is an attractive shape and declares a consensus has been reached, it is difficult to call that real progress in establishing international norms. (Ault 2009: 763)

In the absence of a shared interpretation of the underlying principles, consensus must fail because the underlying conflicts remain unresolved (Grinberg 2016a: 1162–1163), as we will discuss below. [22] The incoherence, indeterminacy and potentially conflictual interpretations of the guidelines suggests that the capacity of both expert groups and the arm’s length principle to reach a sustainable consensus is further diminishing (Grinberg 2016a: 1161; Picciotto 2015: 179). US tax executives have warned about the possible effects of the process on ‘long-standing international tax norms’ (Eccleston & Smith, 2016: 182). Regarding the BEPS process, Grinberg finds that the incomplete consensus was favoured by the fact that long-established norms regulating the expert discourse were invalidated due to increased political salience (Grinberg 2016a: 1159), suggesting that despite the apparent maintenance of authority over the international tax system, the OECD network has undergone indeed a profound transformation.

5.4 Incremental change as source of incoherence

On a technical level, we support the argument that the incremental character of the changes adds to the complexity and incoherence of the international tax system. As Devereux and Vella (2014: 466) maintain, nothing in the arm’s length principle and the distribution of taxation rights to source and residence states guarantees that they are in line with value creation. Equally, Picciotto (2013: 1110) suggests that the proposed guidance is equivoque and misleading, exactly because of its incapacity of specifying how legal rights and economic substance should be reconciled. In the same vein, Avi-Yonah and Xu comment on the conflict between the old and new principles:

The ironic fact is that the patch up of current rules in the BEPS project was made in the name of new mission and new principle. However, because of the inconsistencies and conflicts between the new principle and old principles, the new principle of international tax law has been compromised or undermined by the strengthened current rules based on old principles. Without the support of new principle and new rules, it is very challenging to achieve the new destination of aligning the taxation of MNE profits with economic activity. (Avi-Yonah & Xu, 2016: 24)

It is doubtable that the ambition to apply the criteria of economic substance within the current system is indeed fit for the purpose of remedying the flaws without creating conflicts over interpretations (Picciotto 2015: 179). A direct consequence of the indeterminacy of the guidelines is that single tax administrations will have more freedom to interpretation, giving them better arguments to defend their own taxation practice. As was pointed out in the interviews, the diverging views on what constitutes value creation lies at the heart of these conflicts (AFE interview; BMF interview). As a result, increased negotiation between tax administrations and TNC are expected, raising compliance and enforcement costs (Avi-Yonah & Xu, 2016: 42). Interestingly, both OECD, civil society groups (BEPS Monitoring Group 2015: 7) and business (EY 2014: 8) expect the outcomes to result in an increase of conflicting assessments and double taxation or under-taxation (Grinberg 2016a: 1162). [23]

This development can be expected to be exacerbated by increased transparency, notably Country-by-Country-Reporting (CbCR), which will increase transparency over the distributional effects of the current system on tax shares of developing and emerging countries (Grinberg & Pauwelyn, 2015; AFE interview). [24] Equally, the strengthened right to requalify income and to adjust transfer prices retrospectively to account for the real value by tax administrations under some circumstances (Avi-Yonah & Xu, 2016: 41–42) may result in increased uncertainty (EY 2014: 3). In order to cope with the failure to reach a clear consensus on transfer pricing, states will rely stronger on a conflict resolution mechanism (“mutual agreement procedure”, MAP) as prepared in AP14 (OECD 2015e), which has figured among the most often demanded measures from the business side.

5.5 Politicized expert discourses as reason for incoherence and indeterminacy

We suggest to interpret the incapacity of the OECD to produce consensus as the effect of politicization on social learning processes within expert communities. Politicized expert discourses in the context of the international taxation regime can be linked to what Callon calls hot situations in the production of knowledge (Callon 1998: 260–262). In contrast to cold situations where an agreement on the fundamental properties of the problem and the appropriate frame within which it can be addressed are established, and hence calculations become possible, hot situations are marked by fundamental disagreement on which facts should be taken into account when making this calculation. Rationally-oriented technocratic discourse becomes difficult because each definition of a problem creates on-going overflows, which prevents the identification of stable relations between different elements, actors, tools, and actions (Callon 1998: 260).

With regards to the BEPS process, we identify the increased heterogeneity of expert groups and the heightened focus on distributional issues as two factors which lead to a hot situation in the elaboration of the proposals, giving rise to the incoherence and indeterminacy of the guidelines. These developments are exacerbated by the organizational dynamics established in the previous section, notably the top-down agenda-setting and the institutional framework including emerging countries and non-state actors.

According to Grinberg (Grinberg: 1159–1163), the opening of the expert discourse to include other state and non-state actors has changed dramatically the patterns of expert discourse, exemplifying how patterns of social learning within the expert community can significantly be altered due to political leaders and experts of civil society organizations claiming their “capacity to alter their collective practices” (Wood 2015b: 10). As a result of the increased public attention, high-level elected officials and media reports discussed features of the arm’s length principle, adding their own comments and interpretations. [25] The crisis of the international tax regime has been accompanied by a rise of competing experts, academics but most notably the Tax Justice Network, which have presented a different picture of transfer pricing. Transfer pricing is increasingly discussed in hybrid forums (Callon, Méadel & Rabeharisoa, 2002: 195) in which a variety of actors, experts of different academic and professional backgrounds and non-experts in common define and discuss the characteristics of the policy problem.

The most obvious case how the heterogeniety affects expert discourses is the introduction of CbCR, which has been developed and strongly been pushed by professionals around the Tax Justice Network (Seabrooke & Wigan, 2016: 362). While at first sight less visible, the critique of the arm’s length principle within expert communities has led to a significant transformation of its application, strengthening the role of economic activity and the profit split. Importantly, the more heterogeneous expert community has strongly influenced the quality of consensus. As experts have increasingly bemoaned, transfer pricing has become subject to national imperatives rather than technocratic consensus, leading to a diminishing capacity of the expert community to re-unify, facilitate consensus and secure coherence on the arm’s length principle.

Furthermore, the top-down procedure established within the politicized environment has led to a stronger focus on distributional issues, with country delegates less willing than before to agree on compromises (Grinberg 2016a: 1158). One interviewee even argued that the BEPS process has completely lost the focus of its original intention to curb BEPS, but has almost entirely been occupied by distributional questions between state representatives (AFE interview). He suggested that the interest of tax administrations for residual profits has strongly been rising in consequence of the reported transfer pricing abuses (see also SJ interview). The obligations of taxpayers were previously strongly limited to demonstrating that the actual pricing corresponded to the price of comparables, neglecting the amount of income not attributed to either entity (AFE interview). Despite the rhetoric of the Action Plan (OECD 2013b), suggesting that the problem of BEPS will be targeted without fundamentally revising the distribution of taxation rights, the process “touches upon the ongoing discussion about the amount of value creation in source countries” (Kofler 2013: 664; see also; Ault 2013: 1199). This can be explained by the heavier weight of emerging countries in the BEPS process, which have been very active in the process and opted for a more favorable share due to a stronger consideration of local market features (Picciotto 2013: 1111; AFE interview; CSE interview). Economic substance plays a central role in this conflict because it can be used as a tool for emerging countries to claim stronger taxation rights (AFE interview).

Paradoxically, from this point of view, the incremental changes effectuated by the BEPS project in the name of preserving the double taxation regime have led to the situation that the stability of the system is undermined from within by distributional conflicts exploiting the indeterminacy the updated transfer pricing guidelines provide. Rather than conceiving this as a deplorable, yet arbitrary outcome, we argue that this development is inherently linked to the institutional response to the politicized environment. As we tried to argue above, the rhetorical persuasiveness of economic substance has been an essential element of the institutional response of the OECD to the threats to their authority. Emerging out of the interpretation of the crisis focusing on the artificial separation of income and economic activity, the ambition to align taxation and economic substance has allowed to announce a fundamental revision of the international tax regime while technically relying on incremental changes.

6 Assessment of the incremental reforms and conclusion

How can we assess these findings with regards to the question as to whether the incremental changes inhibit the potential for a greater transformation? The enlargement to the G20, the innovative framing of the problem of BEPS, the outputs in the form of soft law necessitating low commitment, and the top-down process as a response to the increased salience of the crisis led to the institutionalization of a process strongly favouring incremental changes and were decisive for the maintenance of the authority of the OECD. The OECD has secured its pivotal position as the central standard-setter by extending the cooperation with the G20 until 2020 (OECD 2015c: 11). At first sight, the process affirms the findings on the strong role of experts in the reforms (Moschella & Tsingou, 2013: 11; Seabrooke & Wigan, 2016: 360; Wilder & Howlett, 2014: 189). In line with predictions on the role of technical organizations (Bell 2011: 884; Eccleston, Kellow & Carroll, 2015: 305; Porter 2003: 527), the OECD has succeeded to promote its own agenda and prevented a complete overhaul of the current system.

Yet, almost paradoxically, while the strategy of the OECD might as well be a regime-preserving strategy responding to the heated political environment, the form of reaction that has been necessary to secure the endorsement of the G20 has significantly altered the dynamics of policy-making. Most importantly this has negatively impacted the capacity of these expert networks to establish a consensus due to the widened community of parties claiming a legitimate interest in participating in the technical debates and the proliferation of distributional conflicts. This trend that will presumably be even more pronounced after the introduction of CbCR and the scheduled stronger inclusion of emerging and developing countries with significantly differing interests (G20 2015: 3), making a consensus even more difficult.

We argue that the incapacity of the guidelines to provide enduring consensus is a source of potential endogenous change. On a technical level, we identify the indeterminacy of the guidelines with regards to economic substance, transparency on the distributional effects due to CbCR and the strengthening of profit split methods as the central elements that may pressure further regulatory actions in the near future. Given the unresolved conflicts in the transfer pricing area, creating strong indeterminacy in the rules, it can be expected that “actors with divergent interests will contest the openings this ambiguity provides because matters of interpretation and implementation can have profound consequences for resource allocations and substantive outcomes” (Mahoney & Thelen, 2010: 11). It is likely that the agreement announced by the OECD marks only the beginning of a process of interpretation, of which it is unclear whether it can be stabilized. Given the indeterminacy of how economic substance was defined in the guidelines provides strong incentives for business, tax administrations and attentive civil society groups to propose their own interpretation, or frame, of the guidelines, the hot situation (Callon 1998: 260) might not easily be cooled down.

Should the warnings of increased conflicting assessments become true, the transfer pricing regime risks losing the coordinative function for which it was institutionalized in the first place (Rixen 2011: 205–208). In our view this somehow contradicts rationalist assumptions, predicting that nation states limit reform exactly because they do not want to undermine the historical compromise enabling the smooth functioning of international trade and investment by minimising double taxation and uncertainty (Rixen 2011: 198). To explain this issue, we find it necessary to adapt his framework by introducing the quality of expert consensus as an independent variable to adequately capture the occurrence of fundamental incoherence and indeterminacy of the international tax regime. There are rationalist reasons as to why this indeterminacy matters: given the strong interests of nation states in reducing double taxation conflicts and the strong threat to the authority of the OECD that a weakening of the historical consensus would cause, we can expect strong institutional reactions to the increased taxdisputes and diverging interpretations of transfer pricing rules. While continuing under-taxation and increased transparency might prevent the de-politicization of the problem of tax avoidance, creating pressure for further reforms, tax disputes and uncertainty will set pressure on the OECD from within. Ambiguity of the rules and unintended consequences might thus bring about more substantive change (Moschella & Tsingou, 2013: 204–205).

While this implies increased fragility of the system and may incentivize further reforms, the outcome is largely contingent. Nevertheless, the BEPS project has already strengthened measures targeting at the unity of the business enterprise, which may suggest a silent transformation in this direction in the following years. However, due to vested interests in the current system and the reinforced capacity of the OECD to intervene in public discourses, we expect this transformation to be procedural and marked by conflicts over the meaning of the current guidelines, notably with regards to the arm’s length principle and the measurement of value creation.

Due to a decrease in the OECD’s capacity to effectively bring about technocratic solutions, the authority of the OECD is increasingly relying on political maneuvering and rhetoric, thus supporting Davies’ argument that neoliberal authority has entered a phase where “contingent strategies for enchanting economics with political substance and reinforcing it with power” are needed to secure authority (Davies 2014: 151). With regards to the State Aid investigations of the EU, we can already identify a competing rhetorical interpretation of conflicting assessments as different members of the U.S. Senate and Treasury have complained publicly that EU investigations disproportionally target US-based companies (Grinberg 2016b: 167). This potentially channels criticism away from the international tax system towards discourses of economic nationalism and tax wars.

In this regard, whether expert networks can be shielded from political pressure in the next years will be decisive concerning the question if the OECD succeeds to re-establish a consensus on the conflictual issues mentioned above. Given the rather recent politicization and inclusion in wider parts of the international community, “it remains to be seen whether the social and economic pressures which have resulted in the politicization of the issue of corporate tax avoidance will break open the carapace of complexity constructed by the international tax technocrats” (Picciotto 2015: 181). If “the carapace” can indeed be opened up, the arm’s length principle might lose its force in re-uniting diverging interests and a political, rather than technical agreement will become even more pressing.

List of interviews held by the authors

AFE interview: Face-to-face interview with the head of transfer pricing of one of the big four accountancy firms, held on the 11 March 2016.

AFE2 interview: Skype interview with a transfer pricing advisor of one of the big four accountancy firms, held in January 2017.

BMF interview: Skype interview with an interviewee of the German Finance Ministry (BMF), held on the 21 March 2016.

CSE interview: Skype interview with a civil society expert, held on 22 March 2016.

OECD interview: Skype interview with an employee of the OECD, held on the 10 March 2016.

SJ interview: Skype interview with a specialized journalist, former employee of a large accountancy firm, held on 20 December 2016.

References

Action Aid. (2015). Levelling up. Ensuring a fairer share of corporate tax for developing countries.August 18, 2016 London. Retrieved from. www.globaltaxjustice.org/sites/default/files/levelling_up_final.pdf.Search in Google Scholar

Ault, H. J. (2009). Reflections on the role of the OECD in developing international tax norms. Brooklyn Journal of International Law, 34(3), 757–782.Search in Google Scholar

Ault, H. J. (2013). Some reflections on the OECD and the sources of international tax principles. Tax Notes International, 70(12), 1195–1201.Search in Google Scholar

Ault, H. J., & Bradford, D. F. (1990). Taxing international income. An analysis of the U.S. system and its economic premises. In Razin, A., & Slemrod, J.(Ed.), Taxation in the global economy(pp. 11-52). Chicago: University of Chicago Press.Search in Google Scholar

Australian Government the Treasury. (2013). Implications of the modern global economy for international tax law and the taxation of multinational enterprises. A consultation paper, April 2013.Search in Google Scholar

Avi-Yonah, R. S. (2016). A proposal for unitary taxation and formulary apportionment (UT+FA) to tax multinational enterprises. In Dietsch, P., & Rixen, T.(Ed.), Global tax governance. What’s wrong, and how to fix it(pp. 289-306). ECPR Press.Search in Google Scholar

Avi-Yonah, R. S., & Xu, H. (2016). Evaluating BEPS, University of Michigan Public Law Research Paper No. 493. August 23, 2016 Retrieved from .Search in Google Scholar

Babb, S. (2013). The Washington consensus as transnational policy paradigm. Its origins, trajectory and likely successor. Review of International Political Economy, 20(2), 268–297.Search in Google Scholar

Baker, A. (2013). The new political economy of the macroprudential ideational shift. New Political Economy, 18(1), 112–139.Search in Google Scholar

Bell, S. (2011). Do we really need a new ‘constructivist institutionalism’ to explain institutional change? British Journal of Political Science, 41(4), 883–906.Search in Google Scholar

BEPS Monitoring Group. (2015). Overall evaluation of the G20/OECD Base Erosion and Profit Shifting (BEPS) project. August 18, 2016 Retrieved from. https://bepsmonitoringgroup.files.wordpress.com/2015/10/general-evaluation.pdf.Search in Google Scholar

Biondi, Y., Canziani, A., & Kirat, T. (2007). The firm as an entity. Implications for economics, accounting and the law. London: Routledge.Search in Google Scholar

Biondi, Y. (2011). The enterprise entity and the constitution of the American economic republic. Accounting, Economics, and Law: A Convivum, 1(3), 1–13.Search in Google Scholar

Black, J. (1997). Rules and regulators. Oxford: Oxford University Press.Search in Google Scholar

Blyth, M. M. (1997). “Any more bright ideas?” The ideational turn of comparative political economy. Comparative Politics, 29(2), 229.Search in Google Scholar

Blyth, M. M. (2007). Powering, puzzling, or persuading? The mechanisms of building institutional orders. International Studies Quarterly, 51(4), 761–777.Search in Google Scholar

Callon, M. (1998). An essay on framing and overflowing. economic externalities revisited by sociology. In Callon, M.(Ed.), The laws of the markets(pp. 244-269). Blackwell: London.Search in Google Scholar

Callon, M., Méadel, C., & Rabeharisoa, V. (2002). The economy of qualities. Economy and Society, 31(2), 194–217.Search in Google Scholar

Carstensen, M. B. (2011). Paradigm man vs. the Bricoleur. Bricolage as an alternative vision of agency in ideational change. European Political Science Review, 3(1), 147–167.Search in Google Scholar

Clifton, J., & Díaz-Fuentes, D. (2015). Is the organisation for economic co-operation and development ready for China? Emerging Markets Finance and Trade, 50(6), 21–36.Search in Google Scholar

Davies, W. (2014). The limits of neoliberalism. Authority, sovereignty and the logic of competition. London: SAGE Publications.Search in Google Scholar

Devereux, M. P., & Vella, J. (2014). Are we heading towards a corporate tax system fit for the 21 st century? Fiscal Studies, 35(4), 449–475.Search in Google Scholar

Dietsch, P., & Rixen, T. (2016). Global tax governance. What it is and why it matters. In Dietsch, P., & Rixen, T.(Ed.), Global tax governance. What’s wrong, and how to fix it. ECPR Press.Search in Google Scholar

Dharmapala, D. 2014;Base erosion and profit shifting. A simple conceptual framework, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 703:1–16.Search in Google Scholar

Durst, M. C. (2010). It’s not just academic. The OECD should reevaluate transfer pricing laws. Viewpoints. Tax Analysts, 247–256. January 18.Search in Google Scholar

Eccleston, R., Kellow, A., & Carroll, P. (2015). G20 endorsement in post crisis global governance. More than a toothless talking shop? The British Journal of Politics & International Relations, 17(2), 298–317.Search in Google Scholar

Eccleston, R., & Smith, H. (2016). The G20, BEPS and the future of international tax governance. In Dietsch, P., & Rixen, T.(Ed.), Global tax governance. What’s wrong, and how to fix it(pp. 175-198). ECPR Press.Search in Google Scholar

Eccleston, R., & Woodward, R. (2013). Pathologies in international policy transfer. The case of the OECD tax transparency initiative. Journal of Comparative Policy Analysis: Research and Practice, 16(3), 216–229.Search in Google Scholar

Ernick, D. (2015). Integration, fragmentation, and global value chains. The beginning of the end of the arm’s-length principle? Tax Management International Journal, 44(167). Retreieved from .Search in Google Scholar

EY. (2014). Bridging the divide. Highlights from the 2014 tax risk and controversy survey. Retrieved August 16, 2016, from. www.ey.com/Publication/vwLUAssets/ey-tax-risk-survey-2014/$FILE/ey-tax-risk-survey-2014.pdf.Search in Google Scholar

G20. (2013). Tax annex to the Saint Petersburg G20 leaders declaration. Saint Petersburg. Retrieved August 17, 2016, from. https://www.whitehouse.gov/sites/default/files/image/files/g-20taxannex.pdf.Search in Google Scholar

G20. (2015). Communiqué. G20 finance ministers and central bank governors meeting. 4-5 September 2015. Ankara, Turkey.Search in Google Scholar

Genschel, P., & Rixen, T. (2015). Settling and unsettling the transnational legal order of international taxation. In Halliday, T. C., & Shaffer, G. C.(Ed.), Transnational legal orders(pp. 154-184). New York: Cambridge University Press.Search in Google Scholar

Grinberg, I. (2016a). The new international tax diplomacy. The Georgetown Law Journal, 104(5), 1137–1196.Search in Google Scholar

Grinberg, I. (2016b). A constructive U.S. counter to EU state aid cases. Tax Notes International, 167–170.Search in Google Scholar

Grinberg, I., & Pauwelyn, J. (2015). The emergence of a new international tax regime. The OECD’s package on base erosion and profit shifting (BEPS). ASIL Insights, 19(24). .Search in Google Scholar

Gupta, A. (2014, September 22). Arm’s length is still the mantra. Tax Notes International, 987–990. .Search in Google Scholar

Hall, P. A. (1993). Policy paradigms, social learning, and the state. The case of economic policymaking in Britain. Comparative Politics, 25(3), 275.Search in Google Scholar

Herzfeld, M. (2015). The power of a name. Stateless income and its failings. Tax analysts (News Analysis, April 2, 2015). Retrieved August 18, 2016, from. http://www.taxanalysts.com/www/features.nsf/Articles/158298E95579DA9C85257E1B004C20F3?OpenDocument.Search in Google Scholar

Herzfeld, M. (2016, December 14). Mutual agreement procedure stats. The BEPS effect. Tax Notes International.Search in Google Scholar

Kane, M. A. (2015). A defense of source rules in international taxation. Yale Journal on Regulation, 32(2), 311–362.Search in Google Scholar

Kirton, J. J. (2013). G20 governance for a globalized world. Farnham: Ashgate Publishing Ltd (Global Finance.Search in Google Scholar

Kleinbard, E. D. (2011a). Stateless income. Florida Tax Review, 11(9), 700–773.Search in Google Scholar

Kleinbard, E. D. (2011b). The lessons of stateless income. Tax Law Review, 65, 99–172.Search in Google Scholar

Kofler, G. (2013). The BEPS action plan and transfer pricing. The arm’s length standard under pressure? British Tax Review, 5, 646–665. .Search in Google Scholar

Lesage, D. (2014). The current G20 taxation agenda. Compliance, accountability and legitimacy. International Organisations Research Journal, 9(4), 32–41.Search in Google Scholar

Lesage, D., & Van de Graaf, T. (2013). Thriving in complexity? The OECD system’s role in energy and taxation. Global Governance, 19(1), 83–92.Search in Google Scholar

Li, J. (2002). Global profit split. An evolutionary approach to international income allocation. Canadian Tax Journal, 50(3), 823–883.Search in Google Scholar

Mahoney, J., & Thelen, K. (2010). A theory of gradual institutional change. In Mahoney, J.(Ed.), Explaining institutional change. Ambiguity, agency, and power. Cambridge, MA: Cambridge University Press 137.Search in Google Scholar

Markham. (2015). A rose by any other name? The OECD’s proposed revised definition of intangibles. Intertax, 43(11), 673–687.Search in Google Scholar

Moschella, M. (2015). The institutional roots of incremental ideational change. The IMF and capital controls after the global financial crisis. The British Journal of Politics & International Relations, 17(3), 442–460.Search in Google Scholar

Moschella, M., & Tsingou, E. (2013). Great expectations, slow transformations. Incremental change in post-crisis regulation. Colchester: ECPR Press.Search in Google Scholar

OECD. (1998). Harmful tax competition. An emerging issue. Paris: Author.Search in Google Scholar

OECD. (2010). OECD transfer pricing guidelines for multinational enterprises and tax administrations. Paris: Author.Search in Google Scholar

OECD. (2011). Multi-country analysis of existing transfer pricing simplification measures. Paris: Author.Search in Google Scholar

OECD. (2012). The OECD work on base erosion and profit shifting. 30.11.2012. Retrieved August 21, 2016, from. http://www.oecd.org/tax/TheOECDworkonBEPS.pdf.Search in Google Scholar

OECD. (2013a). Addressing base erosion and profit shifting. Paris: Author.Search in Google Scholar

OECD. (2013b). Action plan on base erosion and profit shifting. Paris: Author.Search in Google Scholar

OECD. (2014). Guidance on transfer pricing aspects of intangibles. Paris: Author ACTION 8: 2014 Deliverable.Search in Google Scholar

OECD. (2015a). Addressing the tax challenges of the digital economy. Paris: Author Action 1-2015 Final Report.Search in Google Scholar

OECD. (2015b). Aligning transfer pricing outcomes with value creation. Paris: Author Actions 8-10-2015 Final Reports.Search in Google Scholar

OECD. (2015c). Explanatory statement. Paris: Author.Search in Google Scholar

OECD. (2015d). Frequently asked questions. OECD/G20 Base Erosion and Profit Shifting Project. 2015 Final Reports. Retrieved August 21, 2016, from. www.oecd.org/ctp/beps-frequently-asked-questions.pdf.Search in Google Scholar

OECD. (2015e). Making dispute resolution mechanisms more effective. Paris: Author Action 14-2015 Final Report.Search in Google Scholar

OECD. 2015f;OECD Presents Outputs of OECD/G20 BEPS Project for Discussion at G20 Finance Ministers Meeting. Reforms to the International Tax System for Curbing Avoidance by Multinational Enterprises. Retrieved August 22, 2016, from .Search in Google Scholar

Oliver, M. J., & Pemberton, H. (2004). Learning and change in 20th-century British economic policy. Governance, 17(3), 415–441.Search in Google Scholar

Pal, L. A. (2012). Frontiers of governance. The OECD and Global public management reform. Basingstoke: Palgrave Macmillan.Search in Google Scholar

Palan, R. (2003). The offshore world. Sovereign markets, virtual places, and nomad millionaires. Ithaca: Cornell University Press (Cornell paperbacks).Search in Google Scholar

Picciotto, S. (1992). International business taxation. A study in the internationalization of business regulation. New York: Quorum Books.Search in Google Scholar

Picciotto, S. (2013). Can the OECD mend the international tax system? Tax Notes International, 71(12), 1105–1115.Search in Google Scholar

Picciotto, S. (2015). Indeterminacy, complexity, technocracy and the reform of international corporate taxation. Social & Legal Studies, 24(2), 165–184.Search in Google Scholar

Pierson, P. (2000). The limits of design. Explaining institutional origins and change. ICTD Working Papers, 13(4), 475–499.Search in Google Scholar

Porter, T. (2003). Technical collaboration and political conflict in the emerging regime for international financial regulation. Review of International Political Economy, 10(3), 520–551.Search in Google Scholar

Radaelli, C. M. (1998). Game theory and institutional entrepreneurship. Transfer pricing and the search for coordination international tax policy. Policy Studies Journal, 26(4), 603–619.Search in Google Scholar

Rixen, T. (2011). From double tax avoidance to tax competition. Explaining the institutional trajectory of international tax governance. Review of International Political Economy, 18(2), 197–227.Search in Google Scholar

Rixen, T. (2013). Why reregulation after the crisis is feeble. Shadow banking, offshore financial centers, and jurisdictional competition. Regulation & Governance, 7(4), 435–459.Search in Google Scholar

Robé, J.-P. (2011). The legal structure of the firm. Accounting, Economics, and Law, 1(1), 1–86.Search in Google Scholar

Seabrooke, L., & Tsingou, E. (2014). Distinctions, affiliations, and professional knowledge in financial reform expert groups. Journal of European Public Policy, 21(3), 389–407.Search in Google Scholar

Seabrooke, L., & Wigan, D. (2016). Powering ideas through expertise. Professionals in global tax battles. Journal of European Public Policy, 23(3), 357–374.Search in Google Scholar

Sharman, J. C. (2006). Norms, coercion and contracting in the struggle against ‘harmful’ tax competition. Australian Journal of International Affairs, 60(1), 143–169.Search in Google Scholar

Sheppard, L. A. (2012). News analysis. Is transfer pricing worth salvaging? Tax Notes, 136, 467–476.Search in Google Scholar

Sheppard, L. A. (2014). Twilight of the international consensus. How multinationals squandered their tax privileges. Washington University Journal of Law & Policy, 44(1), 61–78.Search in Google Scholar

Silberztein, C. (2015). Should we twist the arm of the principle? Expert guides. Retrieved August 21, 2016, from. https://www.expertguides.com/articles/should-we-twist-the-arm-of-the-principle/ARHCEDGN.Search in Google Scholar

Spencer, D., & McNair, D. (2012). Transfer pricing. Will the OECD adjust to reality. Tax Justice Network. Retrieved August 19, 2016, from. http://www.taxjustice.net/cms/upload/pdf/Spencer_120524_OECD_.pdf.Search in Google Scholar

Stewart, M. (2014). International tax, the G20 and the Asia Pacific. From competition to cooperation? Asia and the Pacific Policy Studies, 1(3), 484–496.Search in Google Scholar

Strasser, K. A., & Blumberg, P. (2011). Legal form and economic substance of enterprise groups. Implications for legal policy. Accounting, Economics, and Law, 1(1), 1–28.Search in Google Scholar

Streeck, W., & Thelen, K. (2005). Introduction. Institutional change in advanced political economies. In Streeck, W.(Ed.), Beyond continuity. Institutional change in advanced political economies. Oxford: OUP Oxford 139.Search in Google Scholar

Tax Justice Network. (2016). Transfer pricing. August 16, 2016 Retrieved from. http://www.taxjustice.net/topics/corporate-tax/transfer-pricing/.Search in Google Scholar

The White House and the Department of the Treasury. (2012). The President’s Framework for Business Tax Reform.Search in Google Scholar

Thelen, K. (2003). How institutions evolve. In Mahoney, J., & Rueschemeyer, D.(Ed.), Comparative historical analysis in the social sciences(pp. 208-240). Cambridge: Cambridge University Press.Search in Google Scholar

Thiemann, M., & Friedrich, J. (2016). Drawing the line. The political economy of off-balance sheet financing. Economic Sociology Newsletter, 17(2), 7–16.Search in Google Scholar

Webb, M. (2004). Defining the boundaries of legitimate state practice. Norms, transnational actors and the OECD’s project on harmful tax competition. Review of International Political Economy, 11(4), 787–827.Search in Google Scholar

Widmaier, W. W., Blyth, M., & Seabrooke, L. (2007). Exogenous shocks or endogenous constructions? The meanings of wars and crises. International Studies Quarterly, 51(4), 747–759.Search in Google Scholar

Wilder, M., & Howlett, M. (2014). The politics of policy anomalies. Bricolage and the hermeneutics of paradigms. Critical Policy Studies, 8(2), 183–202.Search in Google Scholar

Wood, M. (2015a). Beyond accountability. Political legitimacy and delegated water governance in Australia. Public Admin, 93(4), 1012–1030.Search in Google Scholar

Wood, M. (2015b). Puzzling and powering in policy paradigm shifts. Politicization, depoliticization and social learning. Critical Policy Studies, 9(1), 2–21.Search in Google Scholar

Zürn, M., Binder, M., & Ecker-Ehrhardt, M. (2012). International authority and its politicization. International Theory, 4(1), 69–106.Search in Google Scholar

Published Online: 2017-4-7

© 2017 Walter de Gruyter GmbH, Berlin/Boston