The OECD has published a discussion draft on the arm’s length pricing of intangibles when valuation is highly uncertain at the time of the transaction or the intangibles are hard to value. The discussion draft, released on 4 June 2015, is part of Action Item 8 of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. Action Item 8 is focused on assuring that transfer pricing outcomes with respect to intangibles are in line with value creation.
The discussion draft explains that tax authorities face difficulties when verifying the arm’s length basis on which taxpayers determined pricing for transactions involving a specific category of intangibles because of information asymmetry between tax authorities and taxpayers. As the OECD announced when it released its discussion draft on risk, re-characterisation and special measures, the need for special measures arises because of the potential for systematic mispricing in circumstances where no reliable comparable exists, where assumptions used in valuation are speculative and where information asymmetries between taxpayers and tax authorities are acute.
The discussion draft is an improvement upon the prior version to the extent some of the more radical special measures (e.g. those regarding minimal functional entities, thick capitalisation, and capital-rich asset-owning companies) have been eliminated. It relies much more heavily on ‘commensurate with income’ type rules, allowing for use of information in years subsequent to the transfer, to determine the pricing of intangibles. The most controversial aspect of the discussion draft will likely be with respect to the proposals to allow tax authorities to recharacterise a transfer of intangibles based upon speculation about alternative, hypothetical pricing arrangements that could have been entered into. In practice it would lead to significant uncertainty and unpredictability regarding pricing of intangibles. Finally, the discussion draft also attempts to set boundaries around the situations where it would or would not be appropriate for tax administrations to use ex-post information.
The OECD invites interested parties to submit their comments no later than 18 June 2015. A public consultation meeting on this discussion draft and other transfer pricing aspects under Actions 8 – 10 will be held on 6 and 7 July 2015.
More information with respect to the Discussion Draft on Action 8 can be found here.