Strategizing Multinational Tax Risks

Three new publications have been issued by the Business and Industry Advisory Committee (BIAC) to the OECD.  The publications encompass Best Practices and Tax Principles for Multinational Enterprises (MNEs), as well as comments on the OECD Draft Handbook on Transfer Pricing Risk Assessment.  These reports are worthy to note in an effort to better understand the continuing trend of transfer pricing scrutiny.

http://www.biac.org/policygrp/stmts-tax.htm

BIAC Statement of Tax Best Practices for Engaging with Tax Authorities in Developing Countries.  This statement is designed to enhance cooperation, trust and confidence between tax authorities and international business.  Key observations include:

• Each of the 10 Best Practices directs that “Business should” or “Business may.”  Accordingly, it is written from the perspective of business directives.  There are no views or statements addressing Best Practice methodologies to be conducted by tax administrations.

• The last Best Practice states: “Business should consider how best to explain more fully to the public their economic contribution and taxes paid in the jurisdictions in which they operate, where they determine that such explanation would be helpful in building trust in the tax system.”  This statement integrates the concepts of economic contribution and taxes paid with public trust.  Additionally, there are no references to arms-length principles or analysis of functions, assets, or risks.  It is important to note that taxes paid in different jurisdictions arise from very complex laws and regulations that are different in every jurisdiction, thus making it difficult for the public to draw insightful and relevant conclusions.

BIAC Statement of Tax Principles for International Business.  Noted statements include:

• As a tax training principle, international business should only engage in tax planning that is aligned with commercial and economic activity and does not lead to an abusive result.  There is an explicit reference to economic activity, but a lack of terminology referencing arms-length principle or transfer pricing functions, assets or risks.

• A Transparency and reporting principle states: “Where they determine such explanations would be helpful in building public trust in the tax system, they should consider how best to explain to the public their economic contribution and taxes paid in the jurisdictions in which they operate.”  This statement mirrors that from the Statement of Tax Best Practices noted above.

BIAC Comments on the OECD Draft Handbook on Transfer Pricing Risk Assessment, published on 30 April 2013.  This is a very informative document that outlines many of the issues being considered by the OECD, and provides a thoughtful reference for discussions going forward.  Some key  statements include:

• The risk assessment should not exceed 6 months.
• A “low risk” status can bring tangible benefits in terms of a reduced documentation requirement as well as efficiencies in the overall audit process.
• A “deep dive” audit is not always required.
• The first step in transfer pricing risk assessment should consider how the business generates profit, its approach to tax planning, its supply chain and the legal environment in which it operates.
• “From a Transfer Pricing Risk Assessment perspective, we are very keen to see the cooperative compliance approach endorsed early in the Handbook, as a precursor to narrower assessment of transfer pricing risk.”
• “We are concerned that the overall tone and focus of the Handbook could result in a negative and sceptical view of taxpayers.”
• We would be particularly concerned if the use of such subjective language (i.e. large, small and material payments, high-tax and low-tax jurisdictions) led to tax administrations ignoring the arm’s-length principle.
• “Indications of profitability, effective tax rate and comparative profits of related parties are concerning as the implication may be that the transactions are inappropriate.”
• Any risk assessment report should be shared with the taxpayer.

The Appendix provides specific comments to the related paragraphs within the Handbook.  Two examples from Chapter 1, par. 9 are cited for reference:

• Shifting income into jurisdictions where it will be lightly taxed or engaging in related party transactions designed to erode the local country tax base-shifting income is an unhelpful phrase.
• We would welcome clarification that income should be taxed where the functions/assets/risks are performed.

The BIAC comments should be read to better understand the context of the current transfer pricing environment, and how proposals will affect MNEs and tax administrations in the future.