OECD action plan on base erosion and profit shifting – transfer pricing considerations 




On 19 July 2013, the Organisation for Economic Co-operation and Development (OECD) issued an action plan containing 15 action items designed to curb perceived tax abuses by multinational enterprises (MNEs). The OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) was prepared at the urging of the G-20 country finance ministers, who are responding to huge public outcry among their constituents that MNEs are “not paying their fair share of tax”. MNEs and their perceived tax abuses of shifting profits from high-tax to low-tax countries through ‘transfer pricing schemes’ now are a regular feature in the press – witness the spate of articles pillorying companies such as Starbucks, Amazon and Google. OECD working party groups will produce recommendations and detailed guidance related to each action item in the BEPS Action Plan. The G-20 nations hope the recommendations and detailed guidance produced by the OECD to curb BEPS will be adopted as tax laws in each country to create an environment of similar tax laws related to MNEs.

Of the 15 action items in the plan, five pertain specifically to transfer pricing. They largely entail revising the OECD’s transfer pricing guidelines so that perceived BEPS practices employed by MNEs can be curbed and standard transfer pricing documentation formats can be developed. (Most countries have adopted OECD transfer pricing guidelines as the framework of their local transfer pricing rules and regulations.) Here are five action items and their completion deadlines:

Item 4 – Limiting base erosion via deductions & other financial payments. Develop recommendations regarding best practices in the design of domestic rules to prevent base erosion through the use of interest expense and related-party and third-party debt (September 2014) and make changes to the OECD transfer pricing guidelines regarding the pricing of related-party financial transactions (September 2015).

Item 8 – Making transfer pricing outcomes reflect value creation: intangibles. Change the OECD transfer pricing guidelines, and possibly the OECD Model Tax Convention, to prevent BEPS when groups move intangibles among their members through adoption of a broad definition of intangibles and ensuring that profits associated with the transfer and use of intangibles are allocated in accordance with value creation (September 2014). This item also includes the development of transfer pricing rules or special measures for transfers of hard-to-value intangibles and updating guidance on cost contribution arrangements (September 2015).

Item 9 – Making transfer pricing outcomes reflect value creation: risks & capital. Change the OECD transfer pricing guidelines, and possibly the OECD Model Tax Convention, to prevent BEPS when group members transfer risks among themselves or allocate excessive capital to other group members (September 2015).

Item 10 – Making transfer pricing outcomes reflect value creation: high-risk transactions. Change the OECD transfer pricing guidelines, and possibly the OECD Model Tax Convention, to prevent groups from engaging in transactions that would not, or would only very rarely, occur between third parties (September 2015).

Item 13 – Re-examining transfer pricing documentation. Change the OECD transfer pricing guidelines and recommend domestic transfer pricing documentation rules requiring MNE groups to provide governments with information on their global allocation of income, economic activity and taxes paid, according to a common template (September 2014).

The OECD’s work on Action Item No. 4 centres on the belief that MNEs use excessive debt or other financial transactions, e.g., guarantee fees and hybrid instruments, to erode base profits. The OECD likely will target situations where interest expense is deducted in a high-tax country and the corresponding interest income may not be taxed in the recipient country. The use of guarantee fees also likely will be in the sights of the OECD. A notable example of a tax authority’s perception of tax abuse with regard to guarantee fees is the General Electric Capital Canada Inc. v. The Queen tax court case in Canada. The Canada Revenue Agency challenged the validity of GE Capital Canada’s payment of a guarantee fee to its parent company in the US, and the case eventually was heard by the Supreme Court of Canada. The validity of the guarantee fee ultimately was upheld by the Supreme Court. MNEs with related-party financing arrangements of all forms likely will be affected by the OECD’s recommendations for Action Item 4.

Action Item No. 8 focuses on perceived abuse by MNEs through their transfer of intangibles from high-tax countries to low-tax countries for inadequate or nil compensation. In a rapid response to this action item, on 30 July 2013, OECD Working Party Number 6 issued a revised discussion draft covering the treatment of intangibles, after releasing the initial draft in 2012. Comments on the discussion draft from interested parties were due to the OECD on 1 October 2013, and a public consultation was held in Paris on 12-13 November. This discussion draft eventually will replace Chapter VI of the OECD’s transfer pricing guidelines and is designed to produce more robust guidance on how to price intercompany transfers of intangibles. Upon adoption of the revised intangibles rules, most MNEs likely will need to reconsider their methodologies for pricing their cross-border intangibles transactions.

Action Item No. 9 covers MNEs’ alleged abuses of attributing profits to an entity in a low-tax jurisdiction through the shifting of risks and the allocation of capital. Under the current transfer pricing principles, the entity that bears significant business risk generally is allocated a significant portion of the profits involved in intercompany transactions. Tax authorities are concerned that these entities do not bear real or significant risks. Tax authorities also believe taxpayers allocate excessive capital to an entity in a low-tax jurisdiction and then try to assert they should earn the bulk of the profits arising from the intercompany transactions. At this point, it is unclear what measures the OECD will introduce that are designed to curb perceived abuses by MNEs through the attribution of risks and capital.

Action Item No. 10 is designed to produce solutions to supposed BEPS, which is accomplished through legal entities within an MNE group entering into transactions with each other that do not (or rarely) exist between unrelated parties. It must be noted that MNEs do not, as a rule, transact in an identical manner to unrelated parties, simply because they are related. Significantly, this action item states BEPS is caused by MNEs allocating management and head office fees. This is potentially troubling given that these transactions are bona fide transactions according to most countries’ current transfer pricing rules and are a common occurrence within MNE groups. These arrangements often are established with a shared service centre at one entity to produce cost savings through the avoidance of duplication of these services at each group company. Recommendations related to this item likely will impact most MNEs given the prevalence of management fees and head office charges.

Action Item No. 13 centres on examining transfer pricing documentation practices, with an aim toward developing solutions that balance the need for the preparation of transfer pricing documentation by taxpayers in an efficient and cost-effective manner against the need by tax authorities to have ample information needed to conduct transfer pricing audits. On 30 July 2013, the OECD released its ‘White Paper on Transfer Pricing Documentation’. On 3 November 2013, the OECD published its ‘Memorandum on Transfer Pricing Documentation and Country-by-Country Reporting’. The white paper reviewed the transfer pricing documentation rules in force in a number of countries and drew the conclusion that their lack of harmony was causing taxpayers excessive efforts through the need to prepare nonuniform documentation for each country. The OECD then examined several initiatives by governmental bodies and trade groups to develop a common documentation package and likewise concluded they were insufficient or overly burdensome to taxpayers.

It is evident from the white paper that the OECD favours a two-tiered approach to transfer pricing documentation. The upper tier would be a master file covering group activities, e.g., a description of the MNE’s business, information on its intangibles, information on its intercompany financial activities and information on its financial and tax positions. A local country file, which would supplement the master file, then would be prepared to address local country intercompany transactions such as financial information related to local country transactions, comparability analysis and application of the most appropriate method.

The ‘Memorandum on Transfer Pricing Documentation and Country-by-Country Reporting’ is intended to be a common template on which taxpayers would provide each tax authority with information on taxable income, revenues, assets and number of personnel for each country in which they operate. The template is designed to provide transparency for tax authorities and serve as a form of risk assessment in order to identify taxpayers for transfer pricing audits. The fear among taxpayers and tax practitioners is that it will lead to formulary apportionment, whereby tax authorities allocate profits based upon revenues, sales or assets, potentially leading to non-arm’s-length results. The OECD will need to be cautious in its approach to avoid developing a common documentation platform that is potentially more burdensome for taxpayers. Most taxpayers likely will need to revamp their transfer pricing documentation to comply with the two-tiered or similar approach likely to be put forth by the OECD.

Given the momentum towards revising the international tax rules governing MNEs that are aimed at reducing BEPS, the current transfer pricing rules likely will change significantly. All MNEs likely will be affected by these changes and will have to review their current transfer pricing practices and approach to transfer pricing documentation.


William D. James is a transfer pricing principal at BKD, LLP. He can be contacted on +1 (314) 231 5544 or by email: wdjames@bkd.com.

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William D. James


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