BEPS: Transfer Pricing Status Update

BEPS: Transfer Pricing Status Update

Sun 19 Jul 2015

The Organisation for Economic Co-operation and Development (‘OECD’) held its final public consultation on Actions 8-10 (transfer pricing/’TP’) of the Base Erosion and Profit Shifting (BEPS) project on 6 and 7 July 2015.

The first day of meeting focused on the recently published discussion draft on Cost Contribution Arrangements (‘CCAs’) and the discussion draft on Hard-to-Value Intangibles (‘HTVIs’). During the second day, the OECD provided a transfer pricing status update with respect to the other transfer pricing work streams of the BEPS Action Plan.

The aim of this presentation was to give a full status update on TP work done including the work on risks, non-recognition and intangibles, to provide feedback on how significant input provided during the public consultations has been taken into account, and to inform stakeholders about the next steps.  The consultation was the final opportunity for stakeholders to engage directly with the representatives of Working Group 6 and the country delegates. The OECD intends to publish the relevant reports in September before the G20 Finance Ministers Meeting dated 8 October 2015 (Peru). The videos of the two days meeting can be watched as per below.

Changes to the Transfer Pricing Guidance (‘TPG’) and follow up work

It is important to highlight that the OECD Working Party 6 (WP6) has reached consensus on important elements of the work, some of the elements are still under discussion, therefore further changes and amendments are expected in the future. In order to continue the work with developing countries, the United Nations, World Bank, IMF and the OECD are developing a toolkit for developing countries and low income countries on the implementation of transfer pricing measures.

Changes to the existing TPG:

  • Chapter I- delineation of the actual transaction, risk and recognition of the accurately delineated transaction (2015), locational advantages, workforce in place, synergistic benefits (2014);
  • Chapter II- Commodity transactions. Recently approved by WP6;
  • Chapter V – TP documentation. Finalised [Action 13];
  • Chapter VI- Intangibles including Hard to Value Intangibles (2014 and 2015);
  • Chapter VII- Low Value Adding Services. Broad agreement to implement. A full TP analysis will be allowed if deductions are higher than a certain threshold.; and
  • Chapter VIII- Cost Contribution Arrangements.

 In 2016 and 2017, the OECD will continue the work on:

  • Profit splits (Chapter II of TPG);
  • Financial transactions (Chapter I, VII of TPG);
  • Profit attribution to permanent establishment (Action 7); and
  • Work on implementation of Hard to Value Intangibles.

Chapter I of the TPG

The work of WP6 is built around risk and non-recognition.  The most important part is delineating the actual transaction.  Under the draft the focus is on the clarity provided on the relationship between contractual arrangements and conduct. Contractual arrangements form the starting point of the analysis. Knowing the parties’ conduct is relevant to assess whether there are contradictions between contractual arrangements and conduct, to fill in gaps in the contractual arrangement and to interpret the contracts for transfer pricing purposes. Risk is one of the key element and “unexplored” part of the TPG.

As a result of the WP6 work,i) the guidance on risk is now part of the guidance on the functional analysis; ii) a materiality threshold is included: economically significant risks need to be identified with specificity; iii) based on the comments received, the draft does not include anything on moral hazard and recognises risk-return trade offs; iv) control over risk has been clarified; v) financial capacity to assume a risk is included as a criterion on equal footing with control in the analysis on assumption of risk; and vi) the special character of the financial services industry and the interaction between the proposed guidance and the future work on financial transactions is recognised.

For the practical application of the guidance to risk, an analytical framework was provided:


In response to comments received, WP6 has incorporated (in the draft) the notion that risk mitigation and preparatory work relating to the decision making may be outsourced. If such activities are outsourced, the group company in control of the risk should set the objectives of the outsourced activities, assess whether the objectives are met, and have authority to hire or fire the service provider. The guidance recognizes that the parties performing risk mitigation activities and the parties making decisions that shape the policy environment in which the specific risks are assumed do not exercise control over the specific risk. It is also recognised that the mere formalising of the decision making in the form of, for example, minutes of a board meeting and signing of the documents of a board meeting does not qualify as exercising a decision making function sufficient to demonstrate control over risk.

Cash boxes

In the light of the discussion, cash box is a capital reach entity with low or no functionality. If the cash box is not exercising control (or sufficient control) over the financing risk that is connected with the provision of the funding, then the risk is allocated to the group entity that is performing such control functions. The non-recognition rules may also be applicable.

In the light of the before mentioned practice, a cash box with no or low functionality will get no more than a risk free rate of return for the funding itself. It is expected that other BEPS action points could impact cash boxes such as interest deductibility rules (BEPS Action 4), controlled foreign company (CFC) rules (BEPS Action 3), and the minimum standard on treaty abuse (BEPS Action 6) and the application of domestic anti-abuse rules. The OECD will monitor the progress on these points and further work on cash box depends on the outcome of the proposed measures.

Intangibles – Chapter VI of the TPG

No fundamental changes will be made to the proposed guidance developed in 2014 for the non-shaded text. Moreover, corresponding changes based on the new guidance on risk and recognition of the accurately delineated transaction are necessary. Additional guidance on the allocation of the difference between the actual profits and the excepted profits is included; this allocation will be determined based on the way the risks that were assumed by group companies play out. Information asymmetry issues and the risk of mispricing are addressed through the guidance on hard to value intangibles.

Transfer Pricing Documentation – Country-by-Country Reporting

The work on transfer pricing documentation has been finalized by the OECD WP6. The three deliverables published until 7 July will be combined in one document. No further guidance will be published.

Profit Splits

The aim should be to identify the most appropriate method for the case. Therefore, the aim of the follow-up work on profit splits is to unlock the potential of useful guidance within the framework of the most appropriate method rule. WP6 indicated that follow-up work is in 2016/2017.

Next steps

WP6 will finalise the work in July and process the papers in August. The reports will be submitted for formal approval of CFA and for final approval of Council in early October. The Reports will be discussed at the G20 Finance Ministers Meeting on 8 October.

VIDEO ON DEMAND –  Playback of the event is available on line:

6 July

7 July

Source: OECD website:


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