Yes, I am quite familiar with transfer pricing. I've taught full semester courses on it for several years. I haven't done it recently, but I do a lot of transfer pricing work myself.
Let me first of all describe what we're talking about. Transfer pricing refers to the price charged between commonly controlled entities. The reason we have a concept of transfer pricing is that when you're dealing with related entities, related persons, there's no market friction. You can't rely on the fact that one person wants to get the most and the other wants to pay the least because they're all under the same economic control, and therefore there is the availability of the possibility of manipulating prices for tax purposes. That's why we have transfer pricing.
Transfer pricing has a two-edged sword to it. Transfer pricing in tax law refers to the verification process and the rectification process. We go in and we verify, and then if we find the price to be inappropriate, we rectify.
I think there's a growing awareness, at least in the United States, that the basic problem in this area is that the world long ago—and with the leadership of the United States, I might add—got into something called the arm's-length method. So in determining an appropriate transfer price, both for the verification and rectification approaches, we ask ourselves what price would have been charged between these related persons if they had been unrelated. That's what the arm's-length method does. It asks, what would have been the price at arm's length?
That's probably the wrong question. We probably need to go much more in the direction of a method that is easier to apply, much less factually weighted and requiring almost an economics Ph.D. to apply appropriately, and go to something that's simpler and does rough justice in the area.
That's a very brief statement. Tons could be said on this.
One of the problems, frankly, in my opinion, is that the United States led the way into arm's-length pricing, and the OECD has become a religious convert in this area. They think that arm's length is just the most wonderful thing.
I think the world is slowly backing away from arm's length and toward a more formulary approach of setting prices between related parties. We can't go all the way to formulary, but I think this is an area that is changing. It is changing for the better, but what everyone needs to do, it seems to me, is engage in the process of rethinking where we've been for probably more than 50 years now. Thank you.