Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD White Paper’

OECD Memorandum on TP Documentation & Country-by-Country Reporting

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:

Click to access memorandum-transfer-pricing-documentation-and-country-by-country-reporting.pdf

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
  • Other

B. Taxes paid by country

  • Cash or accrual basis
  • National vs. local income taxes
  • Non-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)
  • Other

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
  • Other

These developments provide valuable insight into the future trend of transfer pricing documentation that will provide numerous challenges for every multinational.





OECD: White Paper on Transfer Pricing Documentation

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

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