The non-recognition and recharacterisation of contracts in transfer pricing: exposing the tensions with private contract law

In its Transfer Pricing Guidelines, the Organisation for Economic Co-operation and Development (OECD) recommends that tax authorities should be authorised to not recognise and recharacterise controlled transactions, as may be required in specified exceptional circumstances. Such non-recognition and recharacterisation powers can be found in domestic transfer pricing laws around the world. The objectives of this article are to expose and explain that: (1) such powers risk abrogating fundamental private (contract) law principles; (2) abrogation, in turn, risks undermining peoples’ ability to rely on their contractual agreements; and (3) the implications of such risks are increasingly more alarming as tax authorities appear to pursue exercising such powers with increased frequency.