As the OECD ventures forth in digital transactions and global minimum tax standards, it is always helpful to keep in mind the UN Practical TP Manual for Developing Countries, which adheres to the arm’s-length principle. Links to the Manual and the Committee of Experts on International Cooperation in Tax Matters are provided for reference.
In April 2019, a new chapter was added on Financial Transactions, Profit Splits and revised text on establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits.
- Attachment A: the proposed new Chapter B on Financial Transactions. The draft discusses the importance of corporate financing decisions within multinational groups and how those decisions could lead to tax base erosion. The Chapter discusses interaction with rules and measures against base erosion; common types of intra- group financial transactions and of group financing departments; the process of actual delineation and relevant characteristics of financial transactions; the process and system of credit rating; potential transfer pricing methods, including the use of simplification measures/safe harbours; different types of intra group loans and relevant characteristics; determining the arm’s length nature of intra-group loans; different types of intra group financial guarantees and relevant characteristics; determining the arm’s length nature of intra-group financial guarantees; and available methods. The chapter also discusses cash pooling practices and captive insurance, without getting into further detail on the delineation and arm’s length pricing of those specific transactions. Different types of intra-group loans are mentioned, and the draft identifies four steps to determine the arm’s length nature of intra-group loans: (i) analyse economically relevant characteristics; (ii) accurately delineate the entire transaction undertaken as well as (iii) selection and (iv) application, of the most appropriate transfer pricing method.
- Attachment B: Revision to the guidance contained in the Manual on the transactional profit-split method (Chapter B.3.3.) with the main focus being on seeking consistency of this guidance with the work done in the context of the Inclusive Framework on BEPS, while providing more practical examples.
- Attachment C: A progress draft of the work on sections C.2. Establishing Transfer Pricing Capability in Developing Countries (previously C.5.); C.4. Risk Assessment (Previously part of C.3.) and C.5. Transfer Pricing Audits. The purpose is mainly to streamline the sequences of presentation and to eliminate overlaps in the current text.
The UN Transfer Pricing Subcommittee has provided a work designed to move forward its guidance in updating the UN Practical Manual on Transfer Pricing for Developing Countries. The paper provides three attachments addressing:
- Financial Transactions, a new chapter
- Profit Splits, revised text
- Establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits, revised text
All three attachments are significant and timely issues, noting the EU and other countries similar emphasis on these topics.
The paper is a valuable read in understanding UN’s direction on the above issues, and is included as a referenced link.
The EU Joint Transfer Pricing Forum recently published a paper illustrating when to use the profit split method (PSM) and how to accomplish the split of profits per the OECD Guidelines. The report is linked as a reference.
The report is a complement to, and supports, the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.
As this method is not simple, and is also a focus on transfer pricing issues in the US, this paper is valuable into the application and concepts of PSM.
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.
EY’s Global Tax Alert provides a succinct summary of the latest OECD and BEPS developments, including:
- G20 and exchange of information upon request standard
- Multilateral instrument, 68 countries moving forward
- Peer reviews on BEPS 4 minimum standards:
- Action 5, harmful tax practices
- Action 6, treaty abuse
- Action 13, country-by-country reporting (CbCR)
- Action 14, dispute resolution
- Action 5 peer reviews of preferential tax regimes
- Action 13, CbCR exchange relationships; important for US MNE’s and similar jurisdictions without obligatory 2016 reporting
- MAP peer reviews
- Discussion drafts on profit splits and attribution of profits re: PE’s; comment period to Sept. 15, 2017
- Branch mismatch forthcoming revisions
- Common reporting standard
- Digital taxation
OECD is still very busy, with a plethora of BEPS follow-up and other activities, although there seems to be continuing flexibility to gain collaboration that will also lead to added complexity and disputes.
OECD has released discussion drafts on Action 7, attribution of profit to permanent establishments (PEs) and Actions 8-10 (profit splits).
It also requested public review of the document containing conforming changes to Chapter IX (business restructurings) of the OECD Transfer Pricing Guidelines (TPG).
The PE Discussion Draft is not restricted to issues related to PEs that will result from the changes made by the Action 7 Final Report, but also takes into account the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital. This factor is especially important if countries do not adopt the new Action 5 PE Guidelines in a bilateral tax treaty or via the pending multilateral instrument. Thus, this section will be all-encompassing and important to understand the drivers, such as key people functions, behind this issue.
The profit split guidance is indicia of a trend for some governments to apply this standard, albeit not from a pure economic/technical perspective. Therefore, this complex guidance will enhance knowledge of those being asked the question from tax authorities, as well as in developing transfer pricing guidance.
EY’s Global Tax Alert describes these developments in greater detail.
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.