BEPS - Assure that Transfer Pricing Outcomes are in Line with Value Creation

BEPS – Assure that Transfer Pricing Outcomes are in Line with Value Creation

Sun 21 Dec 2014

Release of discussion draft on revisions to Chapter I of the Transfer Pricing Guidelines (Including risk, recharacterisation and special measures)

The OECD has invited stakeholders’ input on the discussion draft which deals with work in relation to Actions 8, 9, and 10 (“Assure that transfer pricing outcomes are in line with value creation”) of the Action Plan on Base Erosion and Profit Shifting (BEPS) on 19 December 2014.

Actions 8, 9 and 10 pertain to a number of closely related topics. These include the development of:

(i) “rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.”

(ii) “rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterised.”

(iii) “transfer pricing rules or special measures for transfers of hard-to-value intangibles.”

Details of the Discussion Draft

In accordance with this mandate, Working Party No. 6 on the Taxation of Multinational Enterprises has developed proposals set out in this discussion draft, which is divided into two parts.

Part I of this discussion draft contains a proposed revision to Section D of Chapter I of the Transfer Pricing Guidelines, and comments are invited on the revisions. The proposals emphasise the importance of accurately delineating the actual transactions, and include guidance on the relevance and allocation of risk. The Section provides guidance on determining the economically relevant characteristics or comparability factors of the controlled transaction. The revisions together with unchanged guidance from the current Section D delineate the features of the controlled transaction which then form the platform for comparison with uncontrolled transactions under the existing guidance found at, in particular, Chapters II and III. Part I concludes the revisions to Section D of Chapter I with further guidance on recharacterisation or non-recognition, including criteria determining when it would be appropriate for the actual transaction not to be recognised.

Part I encompasses issues at the heart of the arm’s length principle, on some of which specific input is sought by Working Party No. 6 before final guidance on these issues is drafted. These issues might be summarised as the extent to which associated enterprises can be assumed to have different risk preferences while they are also in fact acting collaboratively in a common undertaking. Specific questions have been raised in the discussion draft where such issues arise most prominently. Respondents are encouraged to recognise the objectives of Actions 8, 9, and 10 of the BEPS Action Plan, that is to assure that transfer pricing outcomes are in line with value creation, in framing their responses to the specific questions.

Part II of this discussion draft sets out options for some special measures. As the BEPS Action Plan indicates, the main aim of the Transfer Pricing Actions (8-10) is to assure that transfer pricing outcomes are in line with value creation. The BEPS Action Plan also indicates that in order to achieve this aimspecial measures, either within or beyond the arm’s length principle, may be required with regard to intangible assets, risk and over-capitalisation.” Part II of the discussion draft, therefore, outlines some options for potential special measures, and invites comments on them. These measures have been broadly outlined at this stage, and significant design work will need to be undertaken as the measures are further considered.

The options set out in Part II have a close interaction with other actions under the BEPS Action Plan, including Action 3 on strengthening CFC rules and Action 4 on interest deductions. The intention of including these measures in this discussion draft is to invite comments on these measures in advance of the public consultation on CFC rules foreseen in April 2015. With that, the public comments received will feed into the work on this area and will acknowledge the necessity to take account of the close interactions between the actions.

As mentioned in the Guidance on Transfer Pricing Aspects of Intangibles (2014), strong interactions exist between the bracketed and shaded sections of that document and matters covered by this discussion draft. Those bracketed and shaded sections will be completed during 2015 in conjunction with finalising the guidance contained in this discussion draft. Finalising the guidance contained in this discussion draft will also take into account any conforming amendments required to other parts of the Transfer Pricing Guidelines.

This discussion draft is submitted for comment by interested parties. Comments should be submitted by 6th February 2015 (no extension will be granted) and should be sent by email to in Word format (in order to facilitate their distribution to government officials). They should be addressed to Andrew Hickman, Head of Transfer Pricing Unit, Centre for Tax Policy and Administration. Comments in excess of ten pages should attach an executive summary limited to two pages.

Source: OECD website


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