The OECD’s Working Party 6 (WP6) has decided to not add materiality thresholds to OECD guidance on transfer pricing documentation and country-by-country reporting, WP6 delegates said on May 19, during a day-long consultation on a draft of the guidance.
US delegate, Michael McDonald, said that WP6 decided it can not provide any explicit guidance on materiality other than to say that materiality is a local country issue.
“Quantitative materiality thresholds are very difficult to do with respect to a large multinational [because] what is not material for a MNE might be material for a developing country,” McDonald explained.
Belgium’s delegate added that materiality means something different to different countries, making it difficult to create a single standard.
In the discussion draft, WP6 asked stakeholders to comment on whether any more specific guidelines on materiality could be provided and what form the materiality standards should take.
UK delegate, Peter Steeds, said that WP6 is still considering exempting small and medium sized entities from reporting requirements. “The smaller the enterprise becomes, perhaps the stronger the case that there should be some level of exemption,” said Steeds, who is deputy director in Business International at HMRC. McDonald said that it may be a good idea to provide relief for small and medium sized entities because the likelihood of transfer pricing abuse by these entities is reduced.
Consistent with announcements made during a March OECD update on the base erosion profit shifting (BEPS) project, Steeds said WP6 has decided that most data should be reported on an aggregated, country, basis as opposed to a legal-entity-by-legal-entity basis. “The only exception for that is around business functions. . . . We are thinking [of requiring] an expanded list of business functions, but [will also] ask for those business functions to . . . be reported on an entity-by-entity basis,” the UK delegate said.
Steeds also said that WP6 will eliminate the requirement for transactional reporting of intragroup payments of royalties, interest, and services fees, contained in the last six columns of the draft country-by-country template. The information would instead be disclosed in the local file, he said. He said that there remains some concern about reporting of intragroup service transactions, though. Michelle Levac, a transfer pricing specialist with the Canada Revenue Agency and chair of WP6, added that the group is still considering whether to require disclosure of a company’s total intercompany transactions on one line on the template.
Steeds said there is a “strong push” to allow business flexibility to choose the sources of data they can use for reporting, provided it is done consistently. “The working party still needs to think about how reliable that range of source information will be and the conclusions that can be drawn from it,” he said.
In other news, Joseph Andrus, head of transfer pricing at the OECD, said the OECD is “very close” to issuing a discussion draft on low value added services. He also said that the business community should try to push governments to implement transfer pricing safe harbor provisions recently produced by the OECD.
Delivery of Documentation
The consultation was dominated by discussion of business representatives’ “treaty-exchange” proposal. Under this proposal, the country-by-country template and master file would be provided by a multinational to the tax authority of the group’s top holding company. That tax authority would then share the information with other countries through exchange of information provisions.
Alan McLean of BIAC and Catherine Schultz of the National Foreign Trade Council argued that such a mechanism was needed to protect against leaks of confidential company data to competitors. Schultz said that it is critical that proprietary information be kept from competitors, and, unless privacy can be guaranteed, the information should not be exchanged.
Representing the Tax Justice Network, Sol Picciotto countered that there is nothing commercially confidential about the information required in the country-by-country report or the master file. Maria Villanueva Serrano, Oxfam, agreed. She stated that the adoption of a treaty-based model would exclude developing countries from the reform, since many have no treaties or very few treaties. Serrano argued that a parent company should have a direct obligation to report to a country if the company has a presence in that country.
WP6 delegates seemed skeptical of businesses’ treaty-exchange proposal. McDonald said the object of the master file was to provide context for the transactions that governments are analyzing. Given that objective, WP6 was surprised to learn of businesses’ concern about commercial confidentiality, he said. “Are you saying it is not possible to provide context without undermining commercial viability?” he asked.
Norway’s delegate said that transfer pricing rules and documentation requirements are domestic law rules. If a country requires a subsidiary operating in its jurisdiction to provide such information, “would there be any justification for a multinational not to give this information to that country?” he asked.
McLean responded he hoped that the OECD scheme would one day supplant local country domestic law so companies would not be subject to many different types of documentation requests from different countries. He said industry’s proposal is not grounded in a reluctance to share the information with those that have a legitimate interest in the information, but is a preference to ensure the information is provided only once and that the dissemination remains confidential.
Responding to questioning from a US delegate, McLean later acknowledged that he “personally finds it difficult to see anything in the template that would be commercially sensitive.” Some information in the master file could be of concern, though, such as the requirement to provide information on business models and profit splits, he said. Steps should be taken to eliminate the risk, he said.
Andrus noted said that industry’s proposal would require “someone” to prohibit a sovereign nation from requiring that tax information be filed locally. Business representatives may think the OECD has more power than it actually has, he said. He also said that industry’s scheme would require central filing systems in each country to handle other countries’ requests for transfer pricing documentation. He said that this may not work well in some countries.
Marlies de Ruiter, head of the OECD’s Tax Treaty, Transfer Pricing and Financial Transactions Division, wondered how using a treaty mechanism would provide more of a safeguard against leaks of confidential information. De Ruiter noted that automatic exchange of information provisions would lead to widespread dissemination of information. “What kind of multilateral exchange of information are you thinking about?” she asked.
France’s delegate said that the working group is still considering direct transmission of country-by-country information from the parent’s jurisdiction to the jurisdiction of the local affiliate outside of exchange of information agreements. He said he would like more discussion of this proposal. A China delegate said she favored the approach suggested by France.
Serrano reiterated prior calls for public disclosure of country-by-country information. All countries, plus investors and the public should have access this information, she said. Naoyuki Kawaskai of Keidanren was among business representatives that countered that the information in the country-by-country template and master file should not be made public. The purpose of the reporting is for high-level risk assessment, Kawaskai said.
