On 23 May 2016, the OECD Council approved the amendments to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("Transfer Pricing Guidelines"), as set out in the 2015 BEPS Report on Actions 8-10 "Aligning Transfer Pricing Outcomes with Value Creation" and the 2015 BEPS Report on Action 13 "Transfer Pricing Documentation and Country-by-Country Reporting". These amendments provide further clarity and legal certainty about the status of the BEPS changes to the Transfer Pricing Guidelines, which were endorsed by the Council on 1 October 2015, by the G20 Finance Ministers on 8 October 2015, and by the G20 Leaders on 15-16 November 2015.
The amendments approved by the Council translate these BEPS transfer pricing measures into the Transfer Pricing Guidelines, as well as into the Recommendation of the Council on the Determination of Transfer Pricing Between Associated Enterprises, which now contains a reference in the Preamble to these BEPS Reports. Given the way in which the Transfer Pricing Guidelines are integrated into the domestic law of certain countries, including by direct reference to the Guidelines themselves, this update process further clarifies the status of the BEPS changes to the Transfer Pricing Guidelines.
Actions 8-10 – Transfer pricing aspects:
The OECD has included its updated transfer pricing guidance in one report under Actions 8-10, covering: amended guidance on applying the arm’s length principle (revisions to section D of chapter I of the OECD Transfer Pricing Guidelines), notably providing guidance on the identification of the actual transaction undertaken, on what is meant by control of a risk, and on the circumstances in which the actual transaction undertaken may be disregarded for transfer pricing purposes.
Guidance on comparability factors in transfer pricing, including location savings, assembled workforce, and MNE group synergies (additions to chapter I of the OECD Transfer Pricing Guidelines). This guidance remains unchanged from the guidance issued as part of the 2014 report on transfer pricing for intangibles.
New guidance on transfer pricing for commodity transactions (additions to chapter II of the OECD Transfer Pricing Guidelines). A new version of chapter VI of the OECD Transfer Pricing Guidelines addressing intangibles, including new guidance on the return to funding activities and on hard-to -value intangibles. New guidance on low-value adding intragroup services (revisions to chapter VII of the OECD Transfer Pricing Guidelines).
An entirely new version of chapter VIII of the OECD Transfer Pricing Guidelines, covering cost contribution arrangements In addition, the Actions 8-10 package describes additional work to be conducted by the OECD to produce new guidance on the application of the transactional profit split method.
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The specific changes introduced in the OECD Transfer Pricing Guidelines by these Reports are as follows:
- The current provisions of Chapter I, Section D of the Transfer Pricing Guidelines are deleted in their entirety and replaced by new guidance.
- Paragraphs are added to Chapter II of the Transfer Pricing Guidelines, immediately following paragraph 2.16.
- A new paragraph is inserted following paragraph 2.9.
- The current provisions of Chapter V (Documentation) of the Transfer Pricing Guidelines are deleted in their entirety and replaced by new guidance and annexes.
- The current provisions of Chapter VI (Intangible Property) of the Transfer Pricing Guidelines and the annex to this Chapter are deleted in their entirety and replaced by new guidance and annex.
- The current provisions of Chapter VII (special considerations for Intra group services) of the Transfer Pricing Guidelines are deleted in their entirety and replaced by new guidance.
- The current provisions of Chapter VIII (Cost contribution arrangements) of the Transfer Pricing Guidelines are deleted in their entirety and replaced by new guidance.
Although the countries participating in the OECD/G20 BEPS Project had already agreed to the final reports under BEPS Actions 8-10 and 13, the OECD Council Transfer Pricing Recommendation formally adopts the amendments to the TPG as of 23 May 2016. As noted, these changes could have implications for both the OECD member countries and non-member countries.
Individual countries take different approaches with respect to whether and how they incorporate the TPG into their domestic tax systems. For example, in some countries, the domestic rules explicitly refer to the approved OECD TPG. Other countries may not have such an explicit reference. In addition, some countries require some form of administrative or other action to incorporate a new version of the TPG into the domestic law. Some countries may take the view that the amendments to the TPG merely clarify pre-existing transfer pricing principles, and in practice, consequently could have retroactive effect.
Multinational enterprises (MNEs) should understand and analyse the implications of this development for each jurisdiction in which they operate. For example, MNEs should review the amendments to the TPG with respect to their global operations and their current transfer pricing policies and approaches. There will likely be increased scrutiny by tax authorities from OECD member countries and non-OECD member countries applying the concepts of the amendments to cross-border intercompany transactions.
Further work is being undertaken to make conforming amendments to the remainder of the Transfer Pricing Guidelines, in particular to Chapter IX "Transfer Pricing Aspects of Business Restructurings." This work is well advanced and it is expected that Committee on Fiscal Affairs will soon invite interested parties to review the conforming changes to Chapter IX to establish that real or perceived inconsistencies with the revised parts of the Guidelines have been appropriately addressed, and duplication appropriately removed.
