The OECD has provided a discussion memorandum in advance of its 12-13 November public consultation on the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles and the White Paper on Transfer Pricing Documentation. The memorandum presents questions for discussion in addressing implementation issues of a country-by-country reporting template. A summary of the memorandum is provided, with a link for reference:
The memorandum outlines two questions, with alternatives provided for each:
What information should be required?
A. The most critical item will be a report of income earned in a country, with the following approaches outlined.
Net income before tax for each legal entity
Taxable income per tax returns
Accounting segment reporting rules
Internal consolidating income statements
B. Taxes paid by country
Cash or accrual basis
National vs. local income taxes
C. Measures of economic activity
Revenues by customer location
Tangible assets by location
Employees / payroll
Research expenditures by company/country
Marketing expenditures by company /country
Location of intangibles by country
Location of senior management (e.g. 25-50 most highly compensated employees of group)
An interesting comment is also provided for insight: “A key question is whether such reporting will provide any meaningful guidance for risk assessment purposes about the location of real economic activity.” It is noted that the emphasis seems to focus on economic activity, with little mention of transfer pricing functions, assets, or risks.
What mechanisms should be developed for reporting or sharing country-by-country data?
Template completed by parent company and shared via treaty exchange of information mechanisms
Exclusion of information to countries where adequate provisions do not exist to protect confidentiality
Template inclusion in global master file to every country in which there is an affiliate subject to tax
These developments provide valuable insight into the future trend of transfer pricing documentation that will provide numerous challenges for every multinational.
Working Party No. 6 of the Organization for Economic Cooperation and Development (“OECD”) has prepared a Revised Discussion Draft on Intangibles, following an earlier Discussion Draft in June 2012. This revised Draft includes changes based upon comments received, including a public consultation, in 2012.
This Draft addresses, directly and indirectly, actions contained in the OECD Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”). Refer to my 19 July 2013 post for information on the OECD BEPS Action Plan.
The changes in the Draft include a new section addressing local market features, location savings, assembled workforce and group synergies, in addition to explanatory changes to the definition of intangibles. As stated in the Revised Discussion Draft, a transfer pricing intangible is not solely determined by its general tax or accounting characterization. The intangible definition is also mutually exclusive from the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention. Additionally, functions, assets and risks related to intangibles are determined via the functional analysis, and are not presumed to be held by the legal owner of the intangible.
The Draft includes an interesting discussion of the use of projected growth rates and discount rates, including examples in the Annex to illustrate the guidance on special considerations for intangibles.
Written comments may be submitted to the OECD on or before 1 October 2013. A public consultation will also be held on 12-13 November 2013 in Paris, France, selecting speakers from those providing written comments.
Analogous to my 31 July 2013 post for the OECD White Paper on Transfer Pricing Documentation, this Revised Discussion Draft should be reviewed and compared with the current methodology for intangibles, noting significant variations for internal analysis. Intangibles are a significant component of transfer pricing, thus this Draft should be seriously considered by all multinationals.