Paul Sutton discusses the concept of Pareto optimality and its practical application in transfer pricing with Philippe Penelle, a Ph.D. economist with 25 years of TP experience.

Philippe specialises in the valuation of intellectual property and the pricing of contractual contingent and derivative provisions. He is a former leader of the Washington National Tax Transfer Pricing Office of a Big Four Accounting Firm, and a member of the board of the National Association for Business Economics Transfer Pricing Symposium held annually in Washington, DC.

Paul and Philippe discuss:

• What ‘Pareto optimal’ means in the context of controlled transactions
• The related concept of ‘moral hazard’, and how it featured in early OECD discussions regarding the BEPS project
• The implications for the four steps required when applying the arm’s length principle, including the role of agreements in substantiating Pareto optimality
• Examples of transaction types for which the concept of Pareto optimality can create great clarity
• Examples of how Philippe has used this concept to achieve better outcomes for his clients in transfer pricing challenges
• Key takeaways for heads of tax and transfer pricing practitioners when designing transfer pricing policies.

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