OECDEU Transfer Pricing Developments a reflection

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OECD/EU Transfer Pricing Developments a
reflection
Dali Bouzoraa IBFD Technical Director
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Agenda

• Transfer Pricing Trends and Focus
• EU Joint Transfer Pricing Forum
• Ongoing OECD work in the transfer pricing field
• Transfer Pricing and the future ahead
• OECD Authorized Approach (AOA)

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Transfer Pricing Trends and Focus

• Trends
• Increase of Audits in Europes large economies
• Specific issues for emerging economies
• Intangibles and cost sharing agreements (CCA)
• Enforcement and Advance Pricing Agreements (APA)
• Documentation and penalties
• Transfer Pricing Focus
• Restructuring of business models
• Use of low tax jurisdictions
• Low margin and loss making businesses
• Outbound payments for royalties/services
  (intangibles)
• Use of international comparables

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EU TP and Documentation Problems

• Not every country is an OECD member
• Differences on definition of related party and
  acceptable transfer pricing methods
• Differences on local documentation requirements
• Increasing conflicting requirements
• High compliance costs
• EU Response
• Develop standardised documentation for all EU
  entities
• Streamline the EU Arbitration Convention to
  resolve transfer pricing disputes between EU
  Member States

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EU Joint Transfer Pricing Forum

• Background
• EU Joint Transfer Pricing Forum (JTPF) created in
  2002
• The objective of uniform application of transfer
  pricing rules within the EU through pragmatic and
  non-legislative solutions
• 17 meetings between October 2002 and September
  2006
• New members appointed in April 2007
• Arbitration Convention
• Report on the Arbitration Convention (December
  2003)
• Commission Communication and proposal for Code of
  Conduct (April 2004)
• EU Transfer Pricing Documentation
• Report on EU TDP (May 2005)
• Code of Conduct (November 2005)

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EU JTPF (Arbitration Convention)

• Arbitration Convention is designed to set forth
  transfer pricing disputes with the aim to prevent
  double taxation in cases of adjustment by tax
  authorities of the taxable income of related
  enterprises, including PEs
• Code of Conduct developments
• Starting point of the three-year period (deadline
  for a company suffering double taxation to
  present its case to the relevant CA)
• Establishment and functioning of the advisory
  commission that must then arbitrate in the case
• Suspension of tax collection during the procedure

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EU JTPF (Transfer Pricing Documentation)

• Code of Conduct provides Member States and
  taxpayers with a valuable instrument for the
  implementation of standardised and partially
  centralised transfer pricing documentation in the
  EU, with the aim of simplifying transfer pricing
  requirements for cross-border activities
• Code of Conduct developments
• Proposed Masterfile (Core Documentation
  Concept) and Several country-specific templates
• Optional for taxpayers
• Standardisation of the type of information and
  documents
• Protection from documentation related penalties
• Reduction of compliance costs

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EU Transfer Pricing Documentation
Masterfilestandardised documentationrelevant
for all EU group members
Masterfile Standardised documentation Relevant
for all EU group members
standardisedcountry-specific documentation Countr
y A
standardisedcountry-specific documentation Countr
y B
standardisedcountry-specific documentation Countr
y C
Standardised country-specific documentation
Country C
Standardised country-specific Documentation Countr
y A
Standardised country-specific Documentation Countr
y B
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EU Transfer Pricing Documentation

• Common Masterfile (content)
• General description of the business and business
  strategy
• Groups organisational, legal and operational
  structure
• Identification of the associated enterprises
  engaged in controlled transactions
• Groups inter-company transfer pricing
  policy/system
• General description of the controlled
  transactions and functions and risks
• Ownership of intangibles
• Substantiation of the arms length nature of the
  companys transfer pricing
• List of CCA, APA and rulings
• Availability to provide supplementary information
  upon request

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EU Transfer Pricing Documentation

• Country-specific documentation (content)
• Detailed description of the business and business
  strategy
• Information on country specific controlled
  transactions
• Comparability analyses
• Explanation about the selection and application
  of the transfer pricing method(s)
• Relevant information on internal and / or
  external comparables if available
• Description of the implementation and application
  of the groups Transfer Pricing policy

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Ongoing OECD work

• Application of transactional profit methods
• Comparability issues arising from the 1995 OECD
  Guidelines
• Cross-border business restructuring
• OECD project on tax implications of business
  restructuring may have important implications in
  the transfer pricing field
• Attribution of profits to PE
• Parts I III released December 2006
• Revised commentary on Art. 7 released April 2007

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OECD Developments (TPM)

• What are Transactional profits methods (TPM)?
• TPM examine the profits from controlled
  transactions engaged in by one or more related
  enterprises
• Transactional Net Margin method (TNMM)
• Analysis the net profit of a taxpayer from a
  controlled transaction relative to a defined base
  such as costs or assets
• Profit Split method
• Allocates the combined operating profit or loss
  from a transaction to related enterprises in a
  manner that reflects the division of profits that
  would have been expected in an arms length
  arrangement.

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OECD Developments (TPM - Comparability)

• OECD WP6 invited business community to comment
  e.g.
• Status of TPM as last resort methods
• Use of TPM and traditional methods for
  intangibles
• TPM documentation requirements practical
  application
• Use of internal comparables (i.e. definition,
  practical use and general preference over
  external comparables)
• Reviewing sources of information, (i.e.
  reliability, secret comparables, databases and
  foreign source comparables)
• Application of the five comparability factors
• Reviewing processes of selecting or rejecting
  comparables
• Expanding guidance in performing comparability
  adjustments
• Use of multiple year data and aggregation of
  third party transactions
• Enhancing the reliability of the arms length
  range
• Documenting a search for comparables

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Transfer Pricing and the future ahead

• New OECD Transfer Pricing Guidelines in 2008?
• New guidance on comparability, transactional
  methods and documentation requirements
• New paragraph to Art. 25 of the OECD Model
  (Arbitration)
• OECD released (February 2006) a new proposal for
  improving mechanisms for the resolution of tax
  treaty disputes
• WCO/OECD initiative on TP and customs valuation
• Discussion on the customs duty dimension of
  transfer pricing and convergence of customs
  valuation and transfer pricing
• EU JTPF future work
• Development of APA best practices in Europe
• Monitoring implementation of Codes of Conduct
• Exchange of practical experiences (e.g. CCA and
  dispute resolution)
• Impact on small and medium sized enterprises
• Follow-up of the Arbitration Convention in view
  of the OECD work

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OECD Authorized Approach (AOA)

• Future Developments (2007-2008)
• 1st step supplement the Commentary, but only to
  the extent that such addition is in line with the
  existing rules (April 2007)
• 2nd step substantial change of Art. 7 and its
  Commentary (Late 2007)
• Need for multilateral framework agreements for
  amending existing treaties

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OECD Authorized Approach (AOA)

• Applying the 1995 TP Guidelines by analogy to PE
• Art. 7(3) is interpreted as only allowing the
  deduction of expenses incurred abroad or not
  exclusively for the benefit of the PE
• Deletion of Art. 7(5), dealing with purchasing
  offices is suggested, as it is inconsistent with
  the arm's length principle
• KERT is replaced by Significant People Function
  (but maintained for financial institutions)
• Internal interest dealings are (partially)
  recognised
• Capital attribution to a PE
• No rules on symmetrical application of the
  authorised OECD Approach

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Proposed Commentary on Art. 7

• Interpretation of the term profits of an
  enterprise (Adoption of the "functionally
  separate entity approach)
• two-step approach to attribute profits to a PE
• Elimination of existing exceptions to the arm's
  length principle
• maintenance of ban on deductions for internal
  debts (except for Banks)
• require certain amount of funding made up of
  "free capital" and interest bearing debt
• different capital attribution methods
• Symmetry limited to capital attribution

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OECD Authorized Approach (AOA)

• Other issues
• implementation difficulties for some countries
• potential conflicts with UN Model
• Art. 7(3) UN Model (e.g. Brazil)
• unresolved issues
• Full symmetry,
• WHT on fictional payments

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• Thank you!
• d.bouzoraa_at_ibfd.org