The October 5, 2015 releases from the controversial OECD/G20 BEPS Project are finally here. While there is still work to do on a number of the transfer pricing matters, companies now know what will be considered by tax authorities in modernizing country transfer pricing rules and guidelines.
The outcomes of the BEPS project, on one hand, mean nothing quite yet. The OECD has issued tax policy and guidelines. For these guidelines to be meaningful there must be formal adoption under the law. The G20 members and other BEPS Project participants are committed to proceeding from policy to implementation. An appropriate reaction might follow Ford Prefect’s mantra: “Don’t panic”.
Companies can be fairly certain that the new guidance will be followed reasonably closely by G20 member states and others. It’s therefore good to be prepared like Arthur Dent (who always knows where his towel is) for an eventual meeting with the Vogons of the world’s tax administrations under the amended OECD Transfer Pricing Guidelines. After all, a number of countries have already started enacting BEPS-inspired legislation, and adopting BEPS-like administrative positions. Here is what the future looks like, in brief, and from a high altitude:
- A related party transaction will be priced given what it is (or can be proven to be) in fact, not what it says it is on paper. Contracts will be respected if their terms are the same as actual expectations or outcomes. Well drafted contracts are now essential, not optional.
- Risk connected with a related-party transaction can be moved or reassigned by tax authorities between related companies where an entity does not demonstrate control over risk. This will mean having appropriate people making investment decisions and managing and controlling the resulting risk over the lifespan of the investment.
- Capital at risk without control over risk occurring in the entity that invests the capital, with only limited exceptions, will attract only a risk-adjusted return.
- Intangible assets are now defined more broadly. Location savings and market characteristics, argued by China and India to be intangible assets, are now important comparability factors to consider as determinants of price or profit. One-sided approaches that give all intangible returns to one or few group companies will have to be reviewed under the new guidance.
- Valuations of intangible assets and contributions of intangible assets to cost sharing arrangements will receive considerably more scrutiny, and will be revised in certain circumstances after the transaction has occurred if forecasts and actuals differ by more than 20%.
- The arm’s length principle will continue to apply. However, more work is being done on profit split techniques at the OECD. Companies will have to present more robust transfer pricing analyses using an OECD method to convince a tax authority that the profit split is not the most appropriate method to apply.
- Transfer pricing documentation requirements will become more onerous and detailed in most countries, and a ‘master file’ describing the worldwide business will need to be produced and kept up to date and on file.
- Country-by-country reporting requirements begin to take effect in 2016 for large corporations with global revenues exceeding €750 million. Tax authorities will have more data to use in assessing transfer pricing and other risk, and will have to guarantee data security and responsible use.
- Different countries will read and interpret the 186 pages of guidance and examples issued on October 5 differently. Just as transfer pricing disputes between tax authorities and taxpayers is expected to increase, so too will the resulting number of double taxation cases to be resolved between countries. Tax authorities are generally not well prepared to handle the expected significant increase in cases. Expect double tax to persist for a longer period of time. The OECD continues work on dispute resolution procedures and tools.
In the real Hitchhiker’s, a computer called Deep Thought is designed to calculate the “Answer to the Ultimate Question of Life, The Universe, and Everything”. After 7.5 milion years, the answer that resulted was 42 (it should have been 54). The OECD took 2 years to answer a slightly less difficult question about international tax. Don’t panic.
TRANSFER PRICING NEWSLETTER is provided as a free service to clients and friends of Cadesky Tax. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing position. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.