By Doug Connolly, MNE Tax
The OECD’s business forum (BIAC) said in a May 28 comment letter that the OECD’s proposed changes to the OECD model tax convention commentary under article 9 relating to the interaction of transfer pricing and interest deductibility rules go too far, undermining the arm’s length principle and risking double taxation.
BIAC was one of 22 organizations and businesses to submit comments on the OECD’s discussion draft on proposed article 9 changes.
The OECD’s proposed changes include new language stating that once profits between associated enterprises have been allocated in accordance with the arm’s length principle, it is up to domestic law to determine the deductibility of expenses in computing taxable income.
BIAC argued this new language “runs counter to the arm’s length principle,” which requires transactions between associated enterprises to be structured as if they were between independent parties. BIAC said that stating that computation of taxable income is a question of domestic law “would inhibit jurisdictions from providing correlative relief in the form of corresponding counter-adjustments in the event another jurisdiction makes a transfer pricing adjustment.” The result, BIAC contended, would be double taxation.
BIAC added that, to prevent double taxation under the proposed new language, there is an increased need for treaty partners to adopt domestic laws with an arm’s length test and interest limitation recommendations from the OECD’s base erosion and profits shifting (BEPS) Action 4. In this respect, it said it is “critical” for the article 9 commentary to reference the OECD transfer pricing guidelines’ new chapter X on financial transactions, which addresses debt-equity classifications.
The International Chamber of Commerce expressed similar concerns about double taxation, noting that “the changes could compound a recent trend in the international landscape by providing further affirmation for the stance of countries unilaterally to apply domestic limitations that therefore override the treaty position – ultimately resulting in economic double taxation.”
The proposed commentary changes also include new language on evaluating whether an interest payment can be regarded as an arm’s length amount. The new language states that, in addition to examining the terms and conditions of the loan, governments may also need to consider “whether a purported loan should be regarded as a loan or as another kind of transaction, in particular a contribution to equity capital.”
BIAC objected that this language “could suggest that a reclassification of a purported loan as a contribution to equity capital is the most likely or appropriate outcome.” BIAC suggested either removing the reference to treating the transaction as a contribution to equity capital or providing other examples of potential recharacterizations to avoid implying the default reclassification should be as a contribution to equity capital.
In addition, regarding some of the language that the OECD proposed deleting in the revisions, BIAC suggested that portions of the language are still useful and should be retained.
Finally, BIAC stated that a couple of the included changes, although it had no specific objection to them, seemed to be beyond the scope of the current consultation, which BIAC said should be limited to financial transactions.
Other commenters included AstraZeneca, BMR Legal, Damian Preshaw Consulting, Deloitte, European Business Initiative on Taxation, EY, Foglia & Partners, Fortum Corporation, FTI Consulting, Galindez Medrano & Asociados, International Bar Association, KPMG, Maisto e Associati, Mexican Institute of Public Accountants, Moore Global, PwC, South African Institute of Chartered Accountants, Studio Pirola, Tremonti Romagnoli Piccardi e Associati, and the Vienna University of Economics and Business.
Doug Connolly
Doug Connolly is Editor-in-Chief of MNE Tax. He has more than 10 years of experience covering tax legal developments, previously working with both a Big Four firm and a leading legal publisher. He holds a law degree from American University Washington College of Law.
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