Addressing the Transfer-Pricing Problem in an Origin-Basis X Tax

David F. Bradford

NBER Working Paper No. 9843
Issued in July 2003
NBER Program(s):   PE

In a previous paper I described how the tax design called the X Tax would facilitate an international tax system free of many of the complexities and avoidance opportunities plaguing the existing international tax regime and also have neutrality properties generally deemed desirable. A choice must, however, be made between two basic treatments of transborder business transactions --the origin and destination principles. The destination-principle approach sidesteps the need to identify arm's length terms of transborder transactions between related business entities -- the transfer-pricing problem. This serious problem remains in the origin-principle approach, which, however, presents fewer challenges of monitoring the flow of goods and services across borders, obviates what I call the tourism problem' whereby people can reduce their taxes by consuming in a low-tax jurisdiction and, arguably most important, avoids transition effects associated with introduction of the tax and subsequent tax rate changes that occur in the destination approach. In this paper I explore possible special rules for transborder transactions between related parties in an origin-based system to eliminate the transfer-pricing problem.

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Document Object Identifier (DOI): 10.3386/w9843

Published: Bradford, David F. "Addressing The Transfer-Pricing Problem In An Origin-Basis X Tax," International Tax and Public Finance, 2003, v10(5,Sep), 591-610. citation courtesy of

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