The OECD is considering starting two new projects to revise the guidance in Chapter IV (administrative approaches) and Chapter VII (intra-group services) of the Transfer Pricing Guidelines.
OECD has issued scoping papers for public comments addressing transfer pricing disputes and intra-group services, provided for reference herein in addition to Deloitte’s Global TP Alert with insightful comments.
Comments on both subjects are due by June 20, 2018. Both topics are significant, thus a review of the scoping paper focus is recommended, with an opportunity to provide comments.
The Canada Revenue Agency (CRA) published Transfer Pricing Memorandum (TPM)-15 for intra-group services. TPM-15 is meant to “clarify” CRA’s audit policy of intra-group services. Although the guidance references OECD’s 2010 Transfer Pricing Guidelines, it is issued in advance of new OECD guidelines, thereby leading to further global inconsistency and instances of double taxation. Links to a PwC summary and TPM-15 are included for reference:
CRA’s four-pronged approach to allocating costs is:
- Shareholder costs (no allocation)
- Specific non-Canadian entity costs (no allocation to Canadian entities)
- Specific Canadian entity costs (no allocation to non-Canadian entities)
- Corporate group costs, allocated via an arm’s length charge
- “Auditors should refrain from accepting the proportion of sales revenues as a single allocation basis for management fees.”
- Specific provisions in the Income Tax Act on non-deductibility of certain costs trumps treaty arguments, leading to double taxation.
- Indirect tax considerations are also addressed in the memorandum.
CRA’s aggressive approach, coupled with its timing, will result in additional complexity cloaked outside of the double treaty mechanisms for which the goal of avoiding double taxation may be ameliorated via appeal mechanisms.
All organisations with operations in Canada for which costs are allocated should review this memorandum to better understand CRA’s audit intent and processes.
Accordingly, documentation of the benefit provided locally, lack of duplication and transparency of the allocation method is vital in proving the tax benefit for intra-group services.
The OECD has released guidance on its BEPS Action Plan item 10: Transfer Pricing Guidelines re: Low Value-Adding Intra-Group Services. Comments should be submitted by 14 January 2015. A copy of the guidance is attached for reference:
The Guidance, in summary:
- Defines low value-adding intra-group services
- Clarifies the meaning of duplicative activities and shareholder costs
- Provides a 2-5% range for mark-up
- Addresses cost allocation methodologies
- Discusses a simplified benefit test
- Discusses documentation to support the simplified approach
This guidance is required reading for all interested parties working with transfer pricing methodologies addressing intra-group services, noting the fact that simplification in one area of such services may introduce further complexities and ambiguities.