Richard Collier and Aamir Rafiq comment on the OECD's consultation on transfer pricing, held on 12 and 13 November.
On 12 and 13 November, the OECD held a consultation on transfer pricing. Broadcast online and open to members of the public, it was attended by country tax authority delegates to the OECD Working Party No. 6, as well as representatives from interested business, professional, civil society and media groups globally.
How much of what went on was related to BEPS?
It should be remembered that much of the work on intangibles and transfer pricing documentation had been in progress before the base erosion and profit shifting (BEPS) report was published and the action plan agreed by the G20. However, BEPS requires a swifter finalisation of this work than might otherwise have been the case.
The development of a template for sharing information with tax authorities on a multinational’s value chain and on a country-by-country basis also extends the documentation considerations.
There is greater focus too on financial and other high risk transactions as well as where economic value creation takes place.
What’s left to be done on the discussion draft on intangibles?
Further work needs to be done on the definition of intangibles. Specifically, many delegates felt that intangibles should be limited to assets which are proprietary in nature, i.e. with reference to rights which are protected by law or contract. The majority view was that goodwill should be taken into account when determining the arm’s length price of a business transfer, but should not be considered an intangible in its own right.
A large consensus of delegates agreed that the term ‘marketing intangibles’ is potentially confusing and could be removed.
Also discussed was the importance of comparability factors for things like an assembled workforce and group synergies. Delegates stressed the importance of recognising the negative effects of group synergies, as well as the positive ones.
Sections on the use of valuation methods in circumstances where appropriate transfer prices using comparable uncontrolled transactions cannot be found should remain in some form.
It was generally considered that a separate definition for hard to value intangibles is not required.
When would it be appropriate to price a transaction as something else?
The bearing of ‘real economic risk’ is not necessarily aligned with the performance of functions. It was suggested that if risk are to be is shared amongst members of a multinational group, the starting proposition should always (at least in the first instance) be the relevant legal agreements in place.
Delegates generally agreed that recharacterisation was a tool and must be applied cautiously. Specific concern was raised in the event that two tax authorities were to take opposing approaches to recharacterisation, with the potential risk of double taxation that would result and the lack of means to resolve it. It was recommended that recharacterisation must only occur in the limited circumstances as set out in the transfer pricing guidelines.
What different approaches are needed in relation to financial transactions?
Taxpayers are in desperate need of unified guidance.
In determining the appropriate arm’s length prices for loans and guarantees between related parties, it is first necessary to determine the debt capacity of the relevant company. However, even this preliminary task requires consideration of a number of factors, including industry variables and arm’s length comparables, thin capitalisation rules, regulatory requirements and group/ parent affiliation.
The OECD needs to consider whether a single method is then to be preferred in assessing the risk assumption for loans and guarantees or whether approaches based upon market behaviour should be used (for example, appreciating that loans and guarantees have different risk profiles).
Guidance is also needed on the level of adjustment to be made in pricing loans, e.g. should there be an adjustment for prepayment options, subordination clauses or covenants and is there a need to constantly monitor loans for refinancing opportunities/obligations?
Lastly, there is an issue of deductibility and ensuring that taxpayers are not subject to double tax.
How does country-by-country reporting fit with transfer pricing documentation?
The framework proposed by the OECD in the white paper on transfer pricing documentation is a ‘two-tiered approach’, which included the preparation of a detailed global master file, as well as country specific files. It is part of a risk assessment process but is becoming increasingly important for multinationals a tool for avoiding penalties.
The primary objective of BEPS in requiring reporting information on a country-by-country basis is to enhance transparency for tax administrations alone.
Balancing the compliance costs for business is critical in both cases.
There was generally a plea from business for a standardised approach, with better information rather than data for data’s sake. So, the template information should focus on the ‘bigger picture’ (using information which is readily available), the master file requirements should not be so onerous and materiality should be taken into account.
A ‘modulated’ approach, where less information is provided to enable quick implementation of the BEPS-related element may need to be adopted in meeting the September 2014 deadline.
What's next?
OECD Working Party No. 6 has to finalise its revised guidance on intangibles and pursue the various transfer pricing aspects of the BEPS action plan. Given the BEPS time frames and process of agreeing final comments, a draft needs to be ready in the next couple of months.
Richard Collier and Aamir Rafiq comment on the OECD's consultation on transfer pricing, held on 12 and 13 November.
On 12 and 13 November, the OECD held a consultation on transfer pricing. Broadcast online and open to members of the public, it was attended by country tax authority delegates to the OECD Working Party No. 6, as well as representatives from interested business, professional, civil society and media groups globally.
How much of what went on was related to BEPS?
It should be remembered that much of the work on intangibles and transfer pricing documentation had been in progress before the base erosion and profit shifting (BEPS) report was published and the action plan agreed by the G20. However, BEPS requires a swifter finalisation of this work than might otherwise have been the case.
The development of a template for sharing information with tax authorities on a multinational’s value chain and on a country-by-country basis also extends the documentation considerations.
There is greater focus too on financial and other high risk transactions as well as where economic value creation takes place.
What’s left to be done on the discussion draft on intangibles?
Further work needs to be done on the definition of intangibles. Specifically, many delegates felt that intangibles should be limited to assets which are proprietary in nature, i.e. with reference to rights which are protected by law or contract. The majority view was that goodwill should be taken into account when determining the arm’s length price of a business transfer, but should not be considered an intangible in its own right.
A large consensus of delegates agreed that the term ‘marketing intangibles’ is potentially confusing and could be removed.
Also discussed was the importance of comparability factors for things like an assembled workforce and group synergies. Delegates stressed the importance of recognising the negative effects of group synergies, as well as the positive ones.
Sections on the use of valuation methods in circumstances where appropriate transfer prices using comparable uncontrolled transactions cannot be found should remain in some form.
It was generally considered that a separate definition for hard to value intangibles is not required.
When would it be appropriate to price a transaction as something else?
The bearing of ‘real economic risk’ is not necessarily aligned with the performance of functions. It was suggested that if risk are to be is shared amongst members of a multinational group, the starting proposition should always (at least in the first instance) be the relevant legal agreements in place.
Delegates generally agreed that recharacterisation was a tool and must be applied cautiously. Specific concern was raised in the event that two tax authorities were to take opposing approaches to recharacterisation, with the potential risk of double taxation that would result and the lack of means to resolve it. It was recommended that recharacterisation must only occur in the limited circumstances as set out in the transfer pricing guidelines.
What different approaches are needed in relation to financial transactions?
Taxpayers are in desperate need of unified guidance.
In determining the appropriate arm’s length prices for loans and guarantees between related parties, it is first necessary to determine the debt capacity of the relevant company. However, even this preliminary task requires consideration of a number of factors, including industry variables and arm’s length comparables, thin capitalisation rules, regulatory requirements and group/ parent affiliation.
The OECD needs to consider whether a single method is then to be preferred in assessing the risk assumption for loans and guarantees or whether approaches based upon market behaviour should be used (for example, appreciating that loans and guarantees have different risk profiles).
Guidance is also needed on the level of adjustment to be made in pricing loans, e.g. should there be an adjustment for prepayment options, subordination clauses or covenants and is there a need to constantly monitor loans for refinancing opportunities/obligations?
Lastly, there is an issue of deductibility and ensuring that taxpayers are not subject to double tax.
How does country-by-country reporting fit with transfer pricing documentation?
The framework proposed by the OECD in the white paper on transfer pricing documentation is a ‘two-tiered approach’, which included the preparation of a detailed global master file, as well as country specific files. It is part of a risk assessment process but is becoming increasingly important for multinationals a tool for avoiding penalties.
The primary objective of BEPS in requiring reporting information on a country-by-country basis is to enhance transparency for tax administrations alone.
Balancing the compliance costs for business is critical in both cases.
There was generally a plea from business for a standardised approach, with better information rather than data for data’s sake. So, the template information should focus on the ‘bigger picture’ (using information which is readily available), the master file requirements should not be so onerous and materiality should be taken into account.
A ‘modulated’ approach, where less information is provided to enable quick implementation of the BEPS-related element may need to be adopted in meeting the September 2014 deadline.
What's next?
OECD Working Party No. 6 has to finalise its revised guidance on intangibles and pursue the various transfer pricing aspects of the BEPS action plan. Given the BEPS time frames and process of agreeing final comments, a draft needs to be ready in the next couple of months.
