Global Tax Alert | 14 November 2013
OECD holds public consultation on BEPS-related reporting and transfer pricing issues
On 12-13 November 2013, the Organisation for Economic Cooperation and Development (OECD) held a public consultation on several ongoing projects that are related to its Action Plan on Base Erosion and Profit Shifting (BEPS). The two-day meeting was led by OECD Working Party 6, which is the subsidiary group responsible for the OECD's work on transfer pricing, including the development of the OECD's Transfer Pricing Guidelines. The meeting focused first on the proposal for a common template for country-by-country reporting of high-level information to tax authorities and the proposal for a common two-tier approach to transfer pricing documentation. The discussion then turned to an in-depth discussion of transfer pricing aspects of intangibles. These are projects that the OECD has targeted in the BEPS Action Plan for completion by September 2014. The meeting concluded with a discussion of other transfer pricing projects that are contemplated under the BEPS Action Plan. These other projects are expected to be the focus of the OECD's work on transfer pricing through 2015.
The OECD consultation on 12-13 November was an opportunity for interested parties to engage directly with the OECD secretariat and the country representatives who are responsible for the OECD's transfer pricing work. This consultation was particularly important as the OECD has high-profile transfer pricing projects that it intends to complete within the next year under the schedule set forth in the BEPS Action Plan. In addition to the OECD member countries, representatives of several countries that are actively engaged with the OECD on the BEPS project also participated in the consultation, including China and India. There were business participants from around the world, including several EY representatives who made presentations during the meeting. Some non-governmental organizations also attended. In addition, in a first for this type of OECD consultation, the public could listen to the meeting through live streaming.
The OECD issued its BEPS Action Plan, which identifies fifteen focus areas for OECD work on addressing BEPS over the next two years, on 19 July 2013 in connection with a meeting of the G20 Finance Ministers and Central Bank Governors (for more information regarding the Action Plan, see EY Global Alert, OECD issues Action Plan on Base Erosion and Profit Shifting (BEPS), dated 22 July 2013).
On 30 July 2013, the OECD issued two documents on pre-existing transfer pricing that have been wrapped into the BEPS Action Plan: the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles and the White Paper on Transfer Pricing Documentation (for more information see EY Global Alerts: OECD issues Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles, dated 31 July and OECD invites public comments on the White Paper on Transfer Pricing Documentation, dated 1 August 2013). The OECD requested comments on each of these documents and extensive comments were received. These two documents were the central focus of the consultation. In addition, on 3 October 2013, the OECD issued the Memorandum on Transfer Pricing Documentation and Country by Country Reporting, which raised a series of questions on which it sought input at the consultation (for more information see EY Global Alert OECD seeks input on country-by-country reporting, dated 8 October 2013).
The consultation began with opening comments from the OECD representatives. It was noted that the work on transfer pricing for intangibles is quite far advanced, with the OECD having published and received comments on two discussion drafts and having held a first consultation in November 2012. The discussion at this meeting was described as a last step in the work, with the comments received in the latest round described as largely reflecting the view that the revised discussion draft was an improvement. The OECD representatives also reiterated that there is no intention to depart from the arm's length principle for transfer pricing. Finally, the OECD representatives acknowledged that the September 2014 deadlines set forth in the BEPS Action Plan mean that time is short and that they therefore were hopeful that the consultation would yield concrete suggestions on both transfer pricing documentation and country by country reporting.
The first topic on the meeting agenda was the OECD's proposal to develop a common template for multinational businesses to use to provide to tax authorities high-level information about income, taxes and economic activities by country. The business participants commented on both the content of the template and the processes associated with delivery and use of the template. With respect to the content, the business comments echoed some general themes:
- • The information to be provided should be based on readily available data to the extent possible;
- • The information to be provided should be brief and simple;
- • There should be a materiality threshold for the requirement to provide information with respect to a country; The template should be standardized, without localization by country; and
- • There should be flexibility as to the form of information to be provided, given the differences in the types of information that MNCs will be able to produce most readily.
With respect to the delivery and use of the template information, the points made by the business participants included the following:
- • The template should be provided to an MNC's home tax authority and shared with other relevant tax authorities through information exchange;
- • It should be made clear that such information should be used only for initial risk assessment purposes and not as a basis for detailed transfer pricing analysis; and
- • The confidentiality of the information should be protected.
The NGO (non-governmental organization) representatives attending the meeting also commented on the approach to country-by-country reporting. Their view was that the template should contain significantly more information and more detailed information than has been contemplated in the early work on this concept. Moreover, they reiterated prior calls for public disclosure of the country-by-country template, which is not what is contemplated by the OECD Action Plan.
In wrapping up this section of the discussion, the OECD representatives summarized the highlights of the discussion, noting in particular the views that it should be a standardized template, that there should be some flexibility to reflect differences in available data across countries and industries, and that it should be kept as simple as possible.
The second topic on the meeting agenda was the proposed common approach for transfer pricing documentation, which the OECD has proposed would involve a master file with global information and local country files with more transactional information. The OECD representatives began the discussion by reiterating the dual goal of the transfer pricing documentation project: simplification of the transfer pricing documentation requirements for business and at the same time provision to tax authorities of more focused and useful information for transfer pricing audits.
The comments from business representatives in general indicated that the two-tiered approach is an appropriate way of setting up the transfer pricing documentation. Concerns were expressed that the effectiveness of such approach is dependent on the way it is implemented. It was noted that the combination of master file and local file could lead to higher administrative burdens for taxpayers instead of simplification. It was also suggested that materiality concepts should be incorporated and a proposal was made for a layered approach to materiality providing for partial or full exemptions at specified thresholds. The OECD representatives expressed particular interest in better understanding the merits of standardized forms and questionnaires across countries.
The next topic on the meeting agenda was the revised discussion draft on intangibles. This discussion centered around two main topics: the definition of intangibles and comparability factors and the concept of intangible related returns. With regard to the definition, the OECD representatives noted that some of the examples included in the text (e.g., example 16 and 18) may not be aligned with the guidance in the revised draft and that more work would be needed on this.
An important element in the discussion was whether goodwill and going concern value should be included as an intangible in the guidance. An OECD representative noted that there was a concern that if these concepts were not included under the definition, there could be a fragmentation of the intangibles within a group.
The OECD representatives raised the question whether the term ”marketing intangible” should be retained in the guidance. Concern was expressed that the current discussion draft indicates that intangibles should be specifically identified. Marketing intangibles refer to a category that may not be specifically identified. Deleting the reference would potentially open the discussion whether contributions by a distributor to the value of a trademark can constitute an intangible.
The OECD representatives introduced the discussion of the section of the revised discussion draft that addresses assembled workforce, location savings and synergies by stating that this section has been newly introduced. As such, it does not yet necessarily reflect a consensus view, and countries' views may greatly differ. A significant part of the discussion dealt with assembled workforce in combination with secondment. It was acknowledged that secondment is a common topic in international business. Vague guidance on the question whether and when secondment could lead to the transfer of an intangible could create many practical problems. Business requested that the OECD provide clear guidance on this. The statement that assembled workforce is not an intangible asset but a comparability factor was a positive development. However, it was noted that assembled workforce as a comparability factor should only be accounted for if it could be reliably measured.
The discussion then turned to the section of the revised discussion draft that addresses intangible related returns (IRR). It was noted that the countries have not reached a consensus on this section yet. One OECD representative explained that the concept of IRR could be seen as traditional transfer pricing, remunerating contributions by parties at arm's length, based on functions, assets and risks. However, another view of IRR is that it is a new concept, introduced to deal with problematic situations.
The business representatives pointed out that there is insufficient discussion of the remuneration of financial contributions to intangibles in the revised discussion draft. Some examples were provided that illustrated the remuneration of funding in unrelated party situations. Also, practical problems with regard to the application of IRR and the departure from legal ownership were illustrated, like centralization of funding and intellectual property in a MNC, commonly used virtual teams, and contributions spread over multiple years. The OECD was urged to provide more guidance on these important practical topics.
Finally, with respect to the section of the revised discussion draft on the valuation of intangibles, OECD representatives observed that numerous comments had been received on these issues. The question was raised whether it would be better to delete all guidance on valuation. It was acknowledged that a distinction should be made between valuation tools – as described in economic theory – and the usage of the tools for transfer pricing purposes.
The last topic on the meeting agenda was a review of the transfer pricing aspects of the BEPS Action Plan. It was stressed that the procedures for the BEPS related work are somewhat different, including the participation of non OECD countries such as China and India. The transfer pricing work to be done with respect to the BEPS Action Plan specifically, Actions 4, 8-10, and 13, has been divided into six projects:
- • Intangibles;
- • Hard to value intangibles and cost contribution arrangements;
- • Risk and recharacterization;
- • High risk transactions with BEPS;
- • Financial transactions; and
- • Transfer pricing documentation and country-by-country reporting.
The OECD stressed that it will be analyzed whether these issues can be dealt with through traditional transfer pricing approaches. The mandate, however, indicates if this cannot be done, specific measures will have to be considered. The OECD stressed that when introducing special measures, the risk of introducing double taxation should also be addressed. Introducing specific measures could also be seen as an opportunity to potentially simplify existing transfer pricing guidance.
Of these six transfer pricing projects, the first and last were the subject of this consultation and are expected to be completed by September 2014. The other four projects will represent the bulk of the OECD's transfer pricing work through the end of 2015.
The discussion at the OECD consultation underscored the significance of the international tax developments that are under consideration. It also highlighted the aggressive time table that the OECD is planning to meet with respect to these projects. Thus, it is important for companies to be focused now on keeping informed of developments in the OECD and in the relevant countries in which they operate, on assessing the implications of these potential developments for their business models, and on considering getting actively involved in this importance international tax debate.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, International Tax Services, Washington, DC
- • Barbara Angus
+1 202 327 5824
Ernst & Young Belastingadviseurs LLP, Rotterdam
- • Ronald van den Brekel
+31 88 40 79016
EYG no. CM3962