Senior OECD officials defended draft changes to the OECD transfer pricing guidelines on risk, recharacterization, and special measures February 12, arguing that revisions to the guidelines are needed to strengthen the arm’s length principle and to properly align a transaction’s form with its substance.
The discussion draft, released December 19, proposes significant changes to the OECD transfer pricing guidelines to address base erosion and profit shifting (BEPS). The draft seeks to provide a more accurate delineation of related party transactions, provides guidance on the relevance and allocation of risk, and provides for the recharacterization of transactions in some cases.
The OECD wants the arm’s length principle “to lead a healthy life and a long life,” but, to do that, deficiencies in the guidelines must be fixed to facilitate the pricing of “the business reality and not the paper reality,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, during a webcast update of the BEPS project.
Saint-Amans said that all countries involved in the BEPS project agree with the general approach of the draft transfer pricing guidelines, though some areas of disagreement remain “here and there.”
Marlies de Ruiter, Head of Tax Treaty, Transfer Pricing, and Financial Transactions, said that draft provisions that call for delineating the actual transaction do not recharacterize the transaction, as some have claimed. Rather, the rules align form with substance, she said.
It is a “real achievement” that the delegates have agreed to this aspect of the draft transfer pricing guidelines, the OECD official said.
De Ruiter said that country delegates believe that under the new rules, recharacterization would occur only in “very exceptional circumstances,” coming into play when the actual transaction has been delineated, but does not make commercial sense.
She also said that under the draft guidelines, the return to a minimally functional entity in a low tax environment that is highly capitalized may be limited to a financial return. She noted that some delegates want that return to be zero, so that is where the special measures, called for as an option in the draft, would come into play.
De Ruiter also disagreed with critics that say that outsourcing would no longer be possible under the draft guidelines. “Of course outsourcing is still possible, but it needs to be directed by the party in control of the risk,” she said.
Dispute resolution
Saint-Amans said that the OECD is fully aware of the shortcomings of the BEPS draft on dispute resolution.
The draft, released on December 18, identifies obstacles that prevent countries from resolving disputes through the mutual agreement proceedure (MAP) and suggests possible measures to address those obstacles. Notably absent from the draft is a proposal for mandatory binding MAP arbitration, sought by the business community.
Saint-Amans said there is still no consensus on binding arbitration, but he promised much stronger proposals in the next draft.
All countries at the last meeting of the OECD Committee on Fiscal Affairs agreed that much more needs to be done on dispute resolution, Saint-Amans said.
Harmful tax regimes
The OECD announced last week that countries have agreed on a framework to assess whether preferential intellectual property (IP) regimes are harmful, based on a modified nexus approach proposed by Germany and the UK.
Achim Pross, OECD Head of International Cooperation and Tax Administration, said that the OECD is working on aspects of guidance to implement the framework and would appreciate stakeholder input.
The OECD needs help crafting guidance on tracking and tracing research and development expenditures in a way that is not overly burdensome to business, Pross said.
The OECD is also working on safeguards to prevent “IP regime shopping,” so companies do not move to an IP regime country just to get the benefit of grandfathering.
The OECD is also trying to define “qualifying intellectual property,” he said. “We know that patents are in, we know marketing intangibles are out, but there is a ‘functionally equivalent’ space in the middle where we will be developing further guidance,” Pross said.
Pross said that discussions are ongoing on how to set up compulsory exchange of tax rulings between countries. Countries are considering exchanging informal capital rulings, unilateral advance pricing agreements, and conduit-type rulings, he said.
It is not clear whether only new rulings should be exchanged or whether older rulings that are still in force should be included, Pross said.
The group is looking also at whether ruling regimes can be problematic, Pross said.
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