Developing countries need transfer pricing rule simplifications, OECD advises G20

By Doug Connolly, MNE Tax

The OECD highlights the importance for developing countries of streamlining complex transfer pricing rules and facilitating access to country-by-country reports in October 13 recommendations to the G20 finance ministers. The transfer pricing recommendations are part of a broader report addressing how global tax rules could be better tailored to meet the needs of developing countries.

In the report, the OECD includes among its “highest priority” recommendations a need to address how country-by-country reporting could be made more accessible for developing countries while protecting confidentiality and sensitive information. The report states that “only three non-OECD/G20 lower-income countries” have met the standard to be able to receive country-by-country reports from other countries. The OECD notes that this is “an important deficiency” given the value of such reports as transfer pricing risk assessment tools.

The OECD also suggests that measures are needed to simplify transfer pricing rules while maintaining the arm’s length principle. In this respect, it specifically notes that the use of fixed margins or other prescriptive approaches may help lower-capacity countries in addressing the lack of access to local comparables.

Transfer pricing is a significant base erosion and profit shifting (BEPS) risk, the report states, and is identified by most developing countries as among their highest priorities. While developing countries have made progress in strengthening their rules and implementation, many developing countries continue to consider the rules too complex and in need of simplification. Specifically, such countries have asked about simplifications and/or anti-avoidance measures to address base eroding payments relating to royalties and management and service fees.

Developing countries have also requested streamlined approaches for commonly encountered marketing and distribution activities. Such measures have been included, the report notes, in the recent two-pillar OECD agreement. “Amount B” under Pillar One of the OECD agreement is intended to simplify transfer pricing for certain marketing and distribution activities that commonly lead to disputes.

Due to the importance of natural resources to many developing countries, the OECD also states that tools are needed to address, among other matters, transfer pricing and profit allocation issues related to commodities marketing hubs.

The report further includes additional recommendations relating to other types of international tax rules. The other “highest priority” recommendations include support for developing countries in implementing the recent OECD two-pillar agreement, inclusion of developing countries in governing bodies, and incorporating “Working Party No. 9” on consumption taxes into the 140-country Inclusive Framework.