Thursday, 15 January 2015

BEPS Actions 8, 9, and 10: Discussion Draft on Revisions to Chapter I of the Transfer Pricing Guidelines (Including Risk, Recharacterization, and Special Measures)

The Organization for Economic Cooperation and Development on December 19, 2014, issued a non-consensus public discussion draft proposing changes to Chapter I of the transfer pricing guidelines.
The discussion draft addresses BEPS Actions 8, 9, and 10, which concern the development of:

  1. “Rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.”
  2. “Rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterized.”
  3. “Transfer pricing rules or special measures for transfers of hard-to-value intangibles.”

The discussion draft is divided into two parts, each containing examples.
Part I contains a proposed new draft to replace Section D of Chapter I (Guidance for Applying the Arm’s Length Principle) of the OECD transfer pricing guidelines. It increases the emphasis on identifying whether the substance of a transaction is consistent with the contractual relationships by broadly focusing on the economic circumstances of the commercial and financial relations between the parties, as well as enhancing the detailed guidance on performing a functional analysis. A new section on identifying risks in the commercial and financial relationships between the parties has been added. This new material focuses on managing and controlling risk, similar to the emphasis in the revisions to Chapter VI of the transfer pricing guidelines on intangibles, and significantly decreases the importance of contractual allocations of risk.
Part I concludes with new guidance on nonrecognition or recharacterization of the actual transaction that has taken place. This part provides a new requirement that the transaction must possess the fundamental attributes of arrangements between unrelated parties. The example illustrates a transaction that leaves the group worse off on a pre-tax basis and concludes that the transaction lacks the fundamental attributes of an arrangement between unrelated parties, even though many other arm’s length elements of the transaction are present.
Part II of the discussion draft sets out options for “special measures.” These are circumstances when the guidance might abandon the arm’s-length principle to create a simple shortcut to assert a particular allocation of profit. The discussion draft contains five options for which comments are requested. Specific language implementing the options is not provided.
Source & more info: Deloitte