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.
The OECD approved this revision on 16 May 2013 and discusses the benefits and concerns for safe harbour provisions. It encourages appropriate bilateral or multilateral safe harbors for which the previous guidance was generally silent. In an effort to facilitate negotiations between tax administrations, sample memoranda of understanding (MOUs)” are included for competent authorities to establish bilateral safe harbors for certain classes of transfer pricing cases. Sample MOUs are provided for low risk activities of Manufacturing, Distribution, and Research and Development Services.
Benefits to be gained:
Safe harbour concerns:
Divergence from the arm’s length principle
Risk of double taxation, double non-taxation, and mutual agreement concerns
Possibility of opening avenues for tax planning opportunities
Equity and uniformity issues
Sections 4.128 and 4.129 emphasize the fact that safe harbours can be negotiated on a bilateral or multilateral basis, providing significant relief from compliance burdens and administrative complexity. Additionally, a safe harbour is not binding, or precedential, for countries which have not themselves adopted the safe harbour.
In an environment of increasing request for assistance from competent authorities, I am hopeful this tool is used proactively and efficiently by competent authorities to provide certainty for past, current, and future low risk activities. Multinationals should be familiar with these new guidelines and the respective MOUs to aid negotiation efforts in bilateral or multilateral transactions. Discussion of this principle in meetings with competent authorities will hopefully lead to enhanced mutuality, cooperation and resolution.