Joint Venture Pricing Disputes and Arbitration
Posted: 8 Mar 2016 Last revised: 7 May 2016
Date Written: March 8, 2016
Abstract
This paper considers various different methods, all closely linked to transfer pricing, that an exploiter joint venture party Group X may be using to divert value secretly away from its victim joint venturer Group V, within an ultimately pathological, joint venture setup JV.
Examples include: a) contribution of potentially excess investment at overvalue to JV from Group X; b) contribution of investment at undervalue to JV from Group V; c) purchases of potentially excess raw materials at overvalue by JV from Group X; d) purchases of raw materials at undervalue by JV from Group V; e) purchases of potentially excess services at overvalue by JV from Group X; f) purchases of services at undervalue by JV from Group V; g) sale of products at undervalue by JV to Group X; h) sale of products at overvalue by JV to Group V; i) provision of potentially excess lending at overvalue to JV from Group X; j) removal, reduction and exclusion of alternative lending at market or undervalue to JV from Group V and external sources; k) effective takeover and control of JV by Group X; l) confusion of fair market, contractual and accounting book values at JV, caused by Group X; m) under-priced JV-related call options owned by Group X; n) over-priced JV-related put options owned by Group X.
The background environment that can make this possible and even likely includes: o) insider level knowledge and infrastructure at Group X; p) outsider level knowledge and infrastructure at Group V; q) information uncertainty and the difficulty and high fixed costs of establishing external arm’s length pricing benchmarks for Group V; r) perverse incentives and readily available value-diversion implementation mechanisms for Group X; s) predatory culture and weak ethical framework at Group X; t) regulatory and quasi-regulatory capture by Group X.
The final part of the paper discusses how any joint venture party that may be in a Group V victim situation, can look for, detect and prove using a broad toolbox of transfer pricing, statistical and econometric methods, the degree of damage that it has suffered at the hands of its exploiting joint venturer Group X, when seeking redress at international arbitration, in the commercial courts or at alternative dispute resolution.
Keywords: transfer pricing, sales at undervalue, purchases at overvalue, OECD, econometrics, benchmarking, arm's length pricing, loans, options, derivatives
JEL Classification: C72, D21, D43, K42
Suggested Citation: Suggested Citation