On 10 July 2017, the OECD released its revised OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in order to formally incorporate the most significant body of work ever undertaken by the OECD and its member (and indeed some non-member) countries regarding harmful international tax practices – the Base Erosion and Profit Shifting (BEPS) project.
In the process, the incorporation of the specific Action Items 8-10 and 13 re-affirms the position of the “arm’s length principle” as world’s best practice in relation to transfer pricing theory.
Incorporation of BEPS Action Items 8-10 and 13
As is well known, the BEPS project, commenced in 2015, tackles a series of international tax and transfer pricing issues faced by revenue authorities in the form of 15 separate Action Items (both transfer pricing and non-transfer pricing focused). The Action Items, formulated in conjunction with revenue authorities and taxation experts from across the globe, has the ultimate stated aim of closing treaty loopholes and misalignment in tax treatment across jurisdictions, where the end result is double non-taxation of profits generated by a multinational enterprise (MNE) on a global basis.
The Guidelines formally consolidate into a single publication;
- The substantial revisions introduced by the 2015 BEPS Reports on transfer pricing-specific Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation and Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. These amendments, which revised the guidance in Chapters I, II, V, VI, VII and VIII, were approved by the OECD Council and incorporated into the Transfer Pricing Guidelines in May 2016;
- The revisions to Chapter IX to conform the guidance on business restructurings to the revisions introduced by the 2015 BEPS Reports on Actions 8-10 and 13. These conforming changes were approved by the OECD Council in April 2017;
- The revised guidance on safe harbours in Chapter IV. These changes were approved by the OECD Council in May 2013; and
- Consistency changes that were needed in the rest of the OECD Transfer Pricing Guidelines to produce this consolidated version of the Guidelines. These consistency changes were approved by the OECD's Committee on Fiscal Affairs on 19 May 2017.
For further information regarding the OECD’s BEPS initiative and RSM’s commentary on the respective action items:
Affirmation of the arm’s length principle
The OECD Transfer Pricing Guidelines, which last underwent a significant re-write in 2010, have been re-written in a manner that inherently confirms the “arm’s length principle” as the most reliable method for the determination of the most reasonable apportionment of profits across jurisdictions.
In recent years, there have been strident calls by various groups, in particular civil society, developing nations and the UN, to explore an alternative to the arm’s length principle; “global formulary apportionment”, a method of determining a split of profits made by a multinational enterprise through an assessment of headcount, assets, costs and other key indicators.
The OECD Guidelines explore in depth the significant advantages of the historical work undertaken by revenue authorities, advisors and multinationals alike, in refining the application of the arm’s length principle, referencing in particular the build-up of knowledge, collaboration and extensive bodies of work that centre around the independent enterprise theory.
The Guidelines also go to some lengths to dilute the perceived administrative advantages of the “global formulary apportionment” method, calling into question the ability for revenue authorities to gain consensus on the profile of a multinational taxpayer, let alone a reasonable method of apportioning income/profits.
Expansion of relevance
Whilst a significant number of non-OECD member countries currently refer to the OECD Guidelines as ‘best practice’ with regard to their local transfer pricing rules, the revised guidance also seeks to strengthen the impact and relevance of the Guidelines beyond the OECD by inviting non-OECD members to adhere to the Recommendation of the OECD Council on the Determination of Transfer Pricing between Associated Enterprises [C(95)126/FINAL]. The revised Recommendation reflects the relevance to tackle BEPS and the establishments of the Inclusive Framework on BEPS.
Finally, the revised Guidelines includes a delegation by the OECD Council to the Committee on Fiscal Affairs of the authority to approve by consensus future amendments to the Guidelines which are essentially of a technical nature.
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Should you have any queries in relation to the changes as outlined above, or you have any questions with regard to Country-by-Country reporting, including your obligations regarding preparation and submission of Master and Local files, transfer pricing documentation and compliance schedules, please contact your local RSM office.