The OECD published the final report on revised guidance to apply the transactional profit split method, as part of BEPS Action 10. This guidance provides the final text, based on comments received.
Additionally, OECD published final guidance for tax administrations for determining the proper approach to apply for hard-to-value intangibles. This text is included as an annex to Chapter VI of the Transfer Pricing Guidelines. This approach should promote consistency and, hopefully, minimize double taxation.
The text of these reports are provided for reference, as they are a must read for transfer pricing professionals.
TEI has provided comments in response to several OECD BEPS Actions, linked herein for reference.
Action 10:Profit Splits-Key comments:
Profit split methodologies should be limited to scenarios where there is not reliable arm’s length pricing.
Simple examples provided do not provide a comprehensive basis for detailed replies and consideration.
A profit split approach may be subject to abuse by tax authorities.
Hindsight application of transfer pricing methodologies should only be used in exceptional circumstances.
Actions 8-10: TP Guidelines
Transfer pricing analyses discussed in the proposal would require significant resources for MNE’s and tax authorities.
The possible merging of the approaches of attributing profits for Article 7 (PE) and Article 9 (Associated Enterprises) should be clarified.
The imposition of “insufficient transfer pricing documentation” penalties should be abandoned/relaxed by tax authorities for a reasonable period of time after implementation of the new guidelines.
Additional compliance burdens elicit increased complexity and confusion.
Action 4: Interest
The proposal represents a shift away from the arm’s length principle, introducing difficult and impractical problems to resolve.
Capitalisation factors include many considerations other than tax.
Double tax consequences are more likely, as MNE’s will not be able to easily rearrange financing structures worldwide.
The withholding tax impacts should be clarified for foreign tax credit and related calculations.
MNE’s with a higher effective tax rate, and thus less prone to base erosion or profit shifting arrangements, should be excluded.
The concept of global limitation calculations, and interest sharing, needs to be further discussed to determine efficient audit guidance.
Action 10: Commodities
Right to use publicly available quoted exchange prices as a comparable is a welcome proposal.
Discussion of other issues, including pricing, pricing date, and documentation should be further considered and clarified.
TEI’s comments are always informative, practical and highlight issues that are both useful as well as problematic. Therefore, these comments provide an excellent forum, along with comments from other interested parties, for further consideration prior to drafting final guidance.
Tax Executives Institute, Inc. (TEI) recently published comments re: OECD BEPS Action 10, addressing Low Value-Adding Intra-Group Services, and Action 14 re: Dispute Resolution Mechanisms. The comments elicit practical considerations, including worldwide consistency, in their well written and reasoned responses. Although many individuals/organizations have provided comments, TEI’s submissions merit required reading and thoughtful consideration. Links to TEI’s comments are included for reference:
Published MAP guidelines and procedures are welcome, although redacted settlements would also reveal legal basis for outcomes, and may be used as precedent for taxpayers.
KPI’s should be established.
Monitoring the MAP process is an excellent proposal suggested in the report.
A global dispute resolution mechanism and mandatory binding arbitration should be developed, with arbitration available as a pre-MAP appeal avenue.
Deadlines for Competent Authority (CA) requests should be in place, along with penalties for CA if they do not respond timely.
Maintaining confidentiality is critical and should be a primary focus, especially for countries initially adopting this process.
Transparency of independency for Competent Authorities would improve confidence in the process.
Taxpayers should participate in face-to-face meetings to facilitate the process, and a simplified process should initiate MAP assistance.
Precluding taxpayers from using MAP, directly or indirectly giving up their rights, is not acceptable.
Binding arbitration provisions and/or use of a domestic or treaty-based anti-abuse rule should not preclude MAP.
Tax, interest and penalties should be suspended during the MAP process.
The comments on Action 14 are especially critical, as dispute resolution will be a critical factor in ensuring that the BEPS guidelines legislated into law will have consistent, fair and transparent processes to resolve disputes timely and effectively.