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OECD Consults On Transfer Pricing Guidlines

by Ulrika Lomas,, Brussels

11 June 2012

The Organization for Economic Cooperation and Development (OECD) has released two discussion drafts and a consultation paper on proposed revisions to its transfer pricing guidelines.

The documents, released on June 6, include discussion drafts on the transfer pricing aspects of intangibles, and on proposed revisions to the safe harbours section of the transfer pricing guidelines, in addition to a consultation on certain transfer pricing timing issues.

The OECD launched its project on the transfer pricing aspects of intangibles in 2010. A scoping paper was then published on the OECD website for public comment. In the interim three public consultations have been held with interested commentators. At the business consultation held in November 2011, representatives of the business community suggested that it would be helpful if the OECD were to release interim drafts of its work as it progresses for further detailed public comment. The new discussion draft prepared by OECD Working Party No. 6, is such an interim draft. It contains: a proposed revision of the provisions of Chapter VI of the OECD Transfer Pricing Guidelines; and a proposed revision of the Annex to Chapter VI containing examples illustrating the application of the provisions of the revised text of Chapter VI.

The OECD's Guidelines prescribe how transactions between associated enterprises in different tax jurisdictions should be treated to accurately determine the income and expenses of the concerned parties, to ensure the entities are subject to the same tax as would be the case if the entities were unconnected.

Presentations at the previous discussions on the transfer pricing aspects of intangibles focused on five topics:

  • The definition of intangibles for purposes of Chapter VI of the OECD Transfer Pricing Guidelines;
  • The definition and treatment of goodwill for transfer pricing purposes;
  • The definition of the term 'brand' and the importance of brand in transfer pricing analyses;
  • The appropriate approach for determining entitlement to intangible related returns for transfer pricing purposes; and
  • The importance of corporate synergies in a transfer pricing analysis.

The discussion draft on safe harbours has been released as part of its project to improve the administrative aspects of transfer pricing. This project started with a survey of the transfer pricing simplification measures in existence in OECD and non-OECD countries and led to Working Party No.6 to review the current guidance on safe harbours in Chapter IV of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TPG).

According to the OECD, the current guidance in the TPG "has a somewhat negative tone regarding transfer pricing safe harbours" which does not accurately reflect the practice of OECD member countries, a number of which have adopted transfer pricing safe harbour provisions. Also, it says, the current guidance is largely silent with regard to the possibility of a bilateral agreement establishing a safe harbour, even though some countries have favourable experience with such bilateral agreements.

This discussion draft includes proposed revisions of the section on safe harbours in Chapter IV of the TPG and associated sample memoranda of understanding for competent authorities to establish bilateral safe harbours.

The OECD Secretariat has also invited public comment on certain timing issues related to transfer pricing, in connection with the work of Working Party No. 6 on intangibles and other projects. Modifications to the Transfer Pricing Guidelines on these issues have been discussed by the Working Party delegates, but those modifications are not agreed by all countries. The OECD also said that they raise certain difficult issues on which comment by the business community is specifically requested by the Secretariat.

The paragraphs under consideration highlight the fact that OECD member countries follow two different approaches in applying the arm’s length principle, and the consultation is designed to inform the Secretariat of the practical problems caused by the existence of these two different approaches.

Also on June 6, the OECD released a document which presents an updated analysis of existing transfer pricing simplification measures in place in both OECD and non-OECD countries as of January 1, 2012.

The survey described in this document focused specifically on simplification measures countries have adopted as part of their transfer pricing regimes. These include not only safe harbours but also measures such as less stringent documentation requirements, alleviated penalties, and streamlined procedures, among other things. Some of the key findings are that:

  • More than 80% of the respondent countries have transfer pricing simplification measures in place;
  • Almost 75% of available simplification measures are directed to SMEs, small transactions and low value added intra-group services;
  • Out of 33 respondent countries which have simplification measures, 16 countries have safe harbours, i.e. simplified transfer pricing method, safe harbour arm’s length range/rate, safe harbour interest rate, and exemption from transfer pricing rules/adjustment; and
  • Of those 16 countries, 10 countries have simplified transfer pricing methods, safe harbour arm’s length range/rate and safe harbour interest rates.

Written comments on the intangibles and safe harbours discussion drafts are requested to be provided by September 14, 2012. It is anticipated that a public consultation on these discussion drafts will be held in Paris during the week of November 5, 2012. Depending on the nature of the comments received, the OECD may also hold a public consultation on the issue of timing issues related to transfer pricing during the week of November 5.

TAGS: compliance | tax | business | tax compliance | tax avoidance | interest | law | corporation tax | group taxation | offshore | multinationals | transfer pricing

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