On 5 October 2015, the OECD presented its final package of Base Erosion and Profit Shifting (BEPS) measures for a comprehensive, coherent, and co-ordinated reform of the international tax rules. The package was endorsed by the G20 Finance Ministers at their meeting on 8 October 2015, in Lima, Peru. This final package (referred to below as the “Final Report”) includes the work undertaken by the OECD in relation to Aligning Transfer Pricing Outcomes with Value Creation, Actions 8 to 10 of its BEPS Action Plan, which focuses on ensuring that transfer pricing outcomes are aligned with value creation.
The OECD work in the context of Actions 8 to 10 of the Final Report includes guidance on several key transfer pricing areas. These include: (i) the accurate delineation of intercompany transactions, (ii) future work to be completed on the transactional profit split method, (iii) transactions involving intangibles, (iv) commodity transactions, (v) “low-value adding intra-group services” transactions and (vi) cost contribution arrangements (“CCAs”).
Some key takeaways from the almost 200 pages of guidance are:
- The accurate delineation of intercompany transactions is paramount, and the conduct of parties will prevail over contractual arrangements where there is a misalignment between the two;
- A six-step process for identifying risk is provided, with the return for risk allocated to the party that controls the risk and has the financial capacity to assume it;
- Returns from intangibles accrue to the entities that carry out the development, enhancement, maintenance, protection and exploitation functions, and not necessarily to the legal owner of the intangibles;
- Clearer guidance on the application of comparable uncontrolled prices (CUPs) to commodity transactions is offered;
- A safe harbour of five percent is established for low-value adding intra-group services; and
- CCA participants must have the capability and authority to control risks associated with the risk-bearing opportunity. Current contributions can be valued at cost, but pre-existing contributions should be valued under guidance of Chapters I, II, and V of the OECD Transfer Pricing Guidelines.
The guidance published by the OECD attempts to ensure that transfer pricing outcomes align with value creation of multinational enterprise (MNE) groups, while the holistic link with other items of the BEPS Action Plan should make the role of capital-rich, low-functioning entities in a post-BEPS world less relevant. In doing so, the OECD has avoided the need to develop special measures outside of the arm’s-length principle.
Overall, this new guidance will likely result in increased scrutiny from tax authorities, which in turn will place a higher compliance burden on all multinational enterprises.
For a comprehensive synopsis of the issues covered by Actions 8 to 10, we refer to our PwC Newsflash.