My teaching and research generally focuses on taxation, especially international tax. However, I have always had an outsider’s fascination with antitrust law and policy. So when I saw a recent article entitled: Economic Analysis and Evaluation of ‘Fair Prices’: Can Antitrust and International Taxation Learn from Each Other? I was intrigued and couldn’t resist. The article, by Alessandro Turina and Nicolo Zingales explores the economic analysis of pricing and comparability in the transfer pricing regime of international tax and in the competition (antitrust) law of excessive and predatory pricing. Their perspective is global as they draw upon U.S. law, E.U. law, OECD practice, and the distinctive outlook of various European countries.
The authors are restrained in their claims and comparison–they acknowledge the differences in purpose and structure between transfer pricing and antitrust laws. But compelling parallels exist that command our attention. Both regimes rely heavily on price-based analysis in which the underlying methodologies struggle to determine “comparability.” Moreover, both strive to find the appropriate balance among legal certainty, administrability, and burden of proof as between business and government. The article provides a baseline introduction to transfer pricing and competition law, thereby allowing the generally informed reader the ability to understand the place of price analysis in each regime and the challenge of determining comparability.
In transfer pricing, where the aim is to appropriately price transactions between related parties, the standard bench mark has been the price at which unrelated parties would deal in a comparable transaction. In competition law, the EU approach to “excessive” pricing includes a determination as to whether the price charged is unfair “when compared to competing products.” Similarly, some approaches to predatory pricing require identifying the market and the competition–i.e. which businesses and products are similar to the business under scrutiny. As Turina and Zingales discuss, there are competing economic models, differing ideas about measuring cost, and conflicting perspectives about where the risk of decision-maker error should lie (that is, if the economics cannot completely answer the question of whether the price is arm’s length, excessive, or predatory should the system err on the side of low taxes and low prices?–or not). Ultimately, as the authors articulate, “[i]n both cases, the foremost conceptual difficulty encountered by policy makers is how to turn principles and standards which are often based on complex and abstract economic concepts into a workable diagnostic tool with which real actors such as firms (and not markets!) come into dealing.”
The article also can serve as a launching point for thinking more pervasively about the role and use of economic analysis and principles in both setting and applying tax law and antitrust law. Is it possible, as some suggest, that economics has taken over antitrust law and reasoning in the U.S.? What about the implementation of the transfer pricing regime (and the preparation of the ever-important transfer pricing studies)? What do we really mean when we say this? Is there an implicit expectation that law is something more than economic principles, even in the context of business transactions being assessed against a market measure? Does it reflect views about the limitations of economic models and data to answer questions of case by case application rather than offer more sweeping market level assessments? And what can and should be done in recognition of any of these points? There are no simple answers, only more variations on the question. But the opportunity to consider the related reliance by both tax and antitrust law on an economic analysis of pricing and comparability reveals the important role played by economic reasoning and the broader concerns about the dynamics among law, legal policy, and economics. Even if you don’t have a particular interest in transfer pricing or antitrust, the article provides a valuable occasion to consider how we should import economic concepts into legal regimes and at what risk.