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Transfer Pricing Round-Up

By Editorial
December 3, 2013

In this feature we summarize some of the key transfer pricing developments to have taken place over the last six months, including the Organisation for Economic Cooperation and Development’s (OECD’s) ongoing projects in relation to intangibles and BEPS (base erosion and profit shifting) and changes at jurisdiction level.

Setting the Scene In 2013 – Risk Management The Key For Multinationals

Ernst and Young's latest Global Transfer Pricing Survey shows that businesses are taking increasing heed of global attention to multinationals' tax affairs, with EY finding that, overall, 66 percent considered risk management their most pressing issue, up 32 percent from the same survey conducted in 2010.

The report also finds that companies are experiencing a significant increase in unresolved transfer pricing examinations and facing increased penalties and interest when tax authorities formulate assessments. 

Managing transfer pricing in emerging markets is a rising priority for multinational companies, even though 74 percent of those surveyed said they have no full-time transfer pricing personnel in those countries.

Nearly half of the survey respondents (47 percent) reported experiencing double taxation as a result of a transfer pricing audit. Twenty-four percent of parent companies reported being subject to tax penalties in the past three years, in comparison with 19 percent in the 2010 survey and 15 percent in a 2007 edition of the survey. Sixty percent of parent companies are also paying interest charges as a result of transfer pricing adjustments.

E&Y’s findings were echoed by a KPMG survey carried out during its recent 2013 Tax Summit in Orlando, Florida, which indicated that the major global concerns of United States tax professionals are corporate tax reform and the rigorous pursuit of transfer pricing adjustments by foreign countries.

"It's clear from our survey that tax department leaders are focused on how to manage in the persistent and active regulatory environment in transfer pricing and are also devoting increasing attention to how changes in US tax legislation will affect their global operational decisions," said Jeffrey LeSage, vice chairman of KPMG's US Tax practice. "We believe that these and other key tax issues will present US companies with challenges and opportunities as the global business landscape continues to evolve."

OECD Guidance, Intangibles And BEPS

With more and more countries now choosing to incorporate the OECD’s Transfer Pricing Guidelines into their own transfer pricing regulations, new developments at the level of the OECD are taking on increasing significance. Moreover, transfer pricing is seen as a key battle ground in the OECD’s and G20’s fight to curb corporate tax avoidance, and the BEPS Action Plan could pave the way for important changes in the way transfer pricing rules are enforced in the future.

Safe Harbours

In May, the OECD announced its intention to release new guidance on safe harbours after its Council approved revisions to the Transfer Pricing Guidelines.

The OECD says that the previous guidance was somewhat negative in tone and did not accurately reflect the practices of member countries, a number of which have adopted transfer pricing safe harbour provisions. Concerns were also raised that advice was lacking on the possibility of a bilateral agreement establishing a safe harbour.

The Council is proposing that the TPG now recognize that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty. The amended document will encourage the use of bilateral or multilateral safe harbours under appropriate circumstances, and provide sample memoranda of understanding for any negotiations.


Transfer pricing issues pertaining to intangibles have long been identified as a key area of concern to governments and taxpayers, due to insufficient international guidance in particular on the definition, identification and valuation of intangibles for transfer pricing purposes.

On July 30, 2013, the OECD issued a revised Discussion Draft on transfer pricing guidelines and intangibles, following comments received from business, academic, and civil society representatives.

The new draft includes a number of changes. There is a new section on the local market, location savings, assembled workforce and corporate synergies; explanatory changes to the definition of intangibles; revisions that adopt a more transactional approach, while preserving a clear focus on functions performed, assets used and risks assumed; a new section on the use of corporate names; supplementary guidance on methods and comparability analysis; and changes to the examples given in the Annex.

Transfer Pricing Consultation

The OECD held a two-day public consultation on transfer pricing topics at the OECD Conference Centre in Paris on November 12-13.  The meeting was attended by delegates from more than 35 countries and by more than 150 representatives of business, academia, civil society and the press, and was broadcast live over the internet.

The topics discussed at the meeting included public comments on the July 30 Revised Discussion Draft on Transfer Pricing Aspects of Intangibles, public comments on the July 30 White Paper on Transfer Pricing Documentation, the BEPS Action Plan requirement to adopt a system of country-by-country reporting of selected company financial data to tax administrations, and the appropriate scope of other transfer pricing aspects of the BEPS Action Plan. 

Will Morris, who chairs the tax and fiscal policy panel of the OECD's Business and Industry Advisory Committee, said during closing remarks that BIAC's principal concern was to design a system that would be useful without creating an additional information-gathering burden, and he was "hopeful" that this would be achieved. However, he added that more work had to be done on standardizing transfer pricing documentation, observing that "smarter" information was needed rather than more information.

Morris described BEPS and the intangibles project as a clash "between a high-level political project on a short time fuse, and a profoundly technical multi-year project," and he said he welcomed the opportunity to re-examine principles in a way that would reunite the OECD with the BRICS countries while also taking account of less developed nations.

The OECD plans to finalise its revised guidance on intangibles and pursue the various transfer pricing aspects of the BEPS Action Plan in due course after considering the discussion at the public consultation.

Other Guidance – The United Nations

On May 29, 2013, the United Nations Committee of Experts on International Cooperation in Tax Matters launched a "Practical Manual on Transfer Pricing for Developing Countries," as a guide for tax officials in developing countries dealing with how multinationals set prices for goods traded between subsidiaries.

Armando Lara Yaffar, who chairs the Committee (CEICTM), explained that the manual took the views of all Member States into account. He described it as a "live document," with some of its technical details still under discussion.

Shamshad Akhtar, UN Assistant Secretary-General for Economic Development at the Department of Economic and Social Affairs (DESA), stated that the manual is consistent with guidelines recently published by the Organisation for Economic Co-operation and Development, and that it helps developing countries to understand those guidelines and to apply them practically. However, Stig Sollund, who is Coordinator of the Subcommittee on Transfer Pricing, which drafted the manual, judged that while there was broad consistency between the two documents, he could not see them being joined and that "both models have their area of use."

Alexander Trepelkov, Director of DESA's Financing for Development Office, announced that the Office would begin developing a comprehensive set of capacity-development tools based on the manual. He also outlined the work of the Capacity Development Programme in International Tax Cooperation, which was created in 2012 after DESA identified fiscal policy and international tax cooperation as a priority area. The Programme supports and disseminates CEICTM's output, strengthening the capacity of developing countries to negotiate, administer and interpret tax treaties, to apply transfer-pricing analysis to multinational transactions, and to develop more effective and efficient tax systems.

The manual was praised by Néstor Osorio, President of the Economic and Social Council, who observed that it demonstrated the prominent role played by the UN on international tax cooperation. However, Yaffar added that it had been drawn up with few resources, and he asked the Council to consider allocating greater resources to CEICTM in the future.

Other speakers included Michael Keen, Deputy Director of the Fiscal Affairs Division at the International Monetary Fund (IMF). Keen explained that the Division provided extensive transfer-pricing advice, and that one goal was to make the information learned from developing countries available to other nations through online tools, publications and other methods.

Marlies de Ruiter, Head of the OECD's Tax Treaty, Transfer Pricing and Financial Transactions Division, argued that strengthening a country's capacity to gain tax revenues was more beneficial than aid expenditures. She gave as an example USAID of USD5.3m that had been invested in El Salvador between 2004-2010, which had resulted in increased annual revenue of USD350m.

Transfer Pricing Disputes

Companies are facing increasingly aggressive scrutiny of their transfer pricing practices from tax authorities across the world, taking many taxpayers rather by surprise. But this is becoming a fruitful area for many governments which more often than not yields substantial amounts of new tax revenue. For example, a briefing issued by HM Revenue and Customs in the United Kingdom in May 2013 revealed that the organization has secured GBP4.1bn (USD6.7bn) of additional tax revenue by challenging the transfer pricing arrangements of multinationals since the creation of a dedicated Transfer Pricing Group in 2008.


One notable example this summer involved Denmark’s largest listed company, Novo Nordisk, the pharmaceutical product manufacturer, which was hit with a DKK5.5bn (USD980m) tax bill after tax authorities ruled that the transfer of rights and patents to two subsidiaries in Switzerland had been made at too low a price, and that the parent company should have been paid more for services it provided.


Another interesting dispute took place in Malaysia – interesting because it happened to be that country’s first ever transfer pricing case.

The decision was the conclusion of a long battle for the taxpayer MM Sdn Bhd, one of the world's largest shipping and logistics operators, after an audit by the Malaysian Inland Revenue Board (IRB) that had resulted in the imposition of tax assessments on the taxpayer. Those assessments were the cause of the dispute in this case.

The disputed issues related to assessments made in the audit pertaining to commission rates, intercompany charges and the resultant penalties for the 1998 to 2005 years of assessment.

The decision of the Malaysian Special Commissioners of Income Tax delivered earlier this year in favour of the taxpayer highlighted the absolute necessity for businesses to prepare transfer pricing documentation in Malaysia.

"It is clear from the decisions above that transfer pricing reports are vital instruments in establishing whether a taxpayers' pricing methodology is in compliance with the prevailing regulations,” observed Nik Armizam, Malaysian partner of Quantera Global, the transfer pricing specialists. “In this specific case, the transfer pricing reports were the key evidence that perhaps won the litigation for the taxpayer."


In India meanwhile, transfer pricing has become a major issue for large foreign investors in the country, and several multinationals have been on the receiving end of transfer pricing adjustments this year.

One of the most high-profile disputes involves Vodafone, which has had its fair share of run-ins with the Indian tax authorities over the last few years. The latest case looks set to rumble on though after the Bombay High Court dismissed a petition in September 2013 questioning a decision to hike the company's tax bill.

In February, the Indian Income Tax Department claimed that the telecoms giant had under-priced shares it issued to a Mauritian subsidiary by as much as INR13bn (USD200m). Vodafone immediately challenged the Transfer Pricing Order issued by the Department, arguing that the Order had "no basis in law," because share subscriptions do not fall under the remit of India's transfer pricing rules.

The High Court disagreed with Vodafone however, and concluded that the transfer pricing authorities did have the right to investigate the alleged unreported cross-border transactions.

Country Developments

Meanwhile, national transfer pricing rules have been firmed up in some countries, while others are considering changes to regulations, usually with the aim of tightening up existing transfer pricing frameworks.


In its latest report, the French General Inspectorate of Finance (IGF) has put forward a raft of recommendations aimed at strengthening existing transfer pricing rules applicable to international groups in France, to better combat tax optimization and avoidance by multinational companies.

The IGF was tasked with comparing international practices used to prevent tax optimization and avoidance via intra-group financial and economic transfers. On the basis of its analysis of regulations currently in place in the US, the UK, Germany, and the Netherlands, the IGF advocated a series of measures to reinforce the French Tax Administration's own arsenal in the area of transfer pricing.


In September 2013, the Indian Government unveiled the final version of its new transfer pricing safe harbour rules, just one month after the Finance Ministry launched a consultation on draft proposals.

This rapid progress is in contrast to the more protracted process of reforming India's transfer pricing rules that has been underway since 2009. That year's Finance Act stipulated that the calculation of an arm's length price was to be subject to safe harbour rules. No agreement could be reached on what shape the new regime was to take, and eventually a committee was established in 2012 to draw up provisions.

The committee drafted safe harbours for the IT and ITES sectors, contract research and development (R&D) in the IT and pharmaceutical sectors, financial transactions involving corporate guarantees and outbound loans, and auto ancillary equipment manufacturers. The Government said last month that it had accepted the majority of the committee's recommendations.

Following the consultation, which closed on August 26, the Government has confirmed that the rules will be applicable for the five assessment years beginning in 2013-14. A taxpayer will be able to opt to use the regime for a period of their choice, providing that this does not exceed five assessment years.

Costa Rica

From October 1, 2013, new laws will come into effect in Costa Rica regulating the prices of goods and services traded between related companies.

The new regulations apply to all Costa Rican companies buying or selling goods or services to related parties both at home and abroad.

Companies are expected to calculate which of their transactions need to be modified before filing their tax declarations for 2013, and next year all companies must conduct a formal study of all their transfer prices, the new laws state.

Hong Kong

In reply to a recent question in the Legislative Council, Secretary for Financial Services and the Treasury, Professor K C Chan, confirmed that Hong Kong's Inland Revenue Department (IRD) has no imminent plans to change its current practices with regard to base erosion and profit shifting (BEPS) and transfer pricing.

Chan said that the IRD's current methodologies and practices adopted for dealing with transfer pricing issues follow the guiding principles provided in the OECD Transfer Pricing Guidelines, and that the regime has been operating well since implementation in 2009.

IRD, he confirmed, has therefore no plan at this juncture to change the current practices, but it will closely monitor international development in this respect, including OECD's discussions, with a view to assessing the need for introducing corresponding measures and consulting local stakeholders in due course.

Other Items Of Interest

Treatment of Management Services Fees

In November 2013, tax consultancy WTS published a survey of how management service fees are treated for transfer pricing purposes in 79 countries, and warned that a unified tax treatment proposed by the OECD would still be interpreted differently in different countries.

WTS questions whether the OECD's Action Plan on BEPS will change the way that charges are treated. According to survey author Jan Boekel: "Where one country could consider the management service charge as base erosion, another country may qualify the same charge as base-protecting."

The survey found that 75 percent of the 79 countries included already have transfer pricing legislation, and that 80 percent have a clear focus on management service charges when it comes to auditing. Further, in many countries such charges are subject to withholding taxes, and they may not be tax deductible.


Even though successive surveys show that greater numbers multinational companies are taking transfer pricing risk more seriously, this is an area that remains a minefield for corporate taxpayers, and will remain so until the OECD Guidelines become more settled. However, businesses that invest additional resources into transfer pricing compliance now could reap the benefit in the future. As John Oatway, EY partner and Canadian Transfer Pricing Leader, observed: "Companies that get the right transfer pricing and tax policies in place up front stand to win over the long term in this tough and controversial environment.”

“Proactively getting the right processes in place to monitor compliance is the only way to avoid costly double taxation and controversy that can take a company off course," Oatway warns.


Tags: trade | legislation | Costa Rica | Other | G20 | Finance | services | penalties | law | interest | audit | multinationals | compliance | regulation | business | Malaysia | Tax | India | Transfer Pricing | transfer pricing | tax



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