As countries continue to align and/or expand the OECD’s transfer pricing documentation (Master File and Local File), including country-by-country (CbC) reporting, the path towards consistency continues to widen, introducing subjective determinations that will potentially lead to additional disputes and double taxation. EY’s Global Tax Alert provides the relevant details.
The Guidelines adopt a substance over conduct principle associated with contracts and require a more detailed analysis of functions performed, assets employed and risks assumed.
The Guidelines require the functional analysis to align value-creating activities with transfer pricing outcomes by increasing remuneration for significant functions undertaken, with an emphasis on financial capacity to assume risk and exercise control over risk. Failure to conform to the terms of the written contract may cause the transaction to be recharacterized according to the factual substance, and transactions without a commercial substance can be disregarded.
Most importantly, the tax authorities will be looking at contracts with the ability to recharacterize or disregard such transaction. To the extent additional approvals and guidelines are not adopted by the relevant tax administration, this may lead to new chaos in the transfer pricing world, including a potential ability to avoid tax treaty interpretations and increase the risk of double taxation.
The intent of various countries to adopt the new OECD transfer pricing models needs to be reviewed early to determine potential risks in one or more countries.