by Julie Martin
A new draft chapter on intragroup services for the United Nations Practical Manual on Transfer Pricing for Developing Countries (the UN transfer pricing manual), publicly released last week, differs from OECD guidance on the topic in a few areas, according to a transfer pricing expert.
The draft was released along with numerous documents relating to the most recent meeting of the UN Committee of Experts on International Cooperation in Tax Matters (the committee), held last October. The meeting concerned updates to the UN transfer pricing manual and the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN model tax treaty), as well as other tax issues of interest to developing countries.
According to the UN documents, the new intragroup services draft will be included in a major update to the UN transfer pricing manual, to be approved at the committee’s annual meeting on October 11–14. Included in the update will be new chapters on intangibles, business restructuring, and cost contribution arrangements. The UN manual’s provisions on transfer pricing documentation are also being updated, and a new annex is being prepared which will identify available technical assistance and capacity-building resources for developing countries.
All the transfer pricing work is being undertaken by the UN committee’s Subcommittee on Article 9 (Associated Enterprises): Transfer Pricing (the transfer pricing subcommittee). So far, only the chapter on intragroup services has been publicly released.
Stig Sollund, who chairs the transfer pricing subcommittee, said that all updates to the transfer pricing manual will “as far as possible, be consistent with the consensus decisions under the [OECD/G20 base erosion profit shifting (BEPS)] project,” according to a report of the committee’s last meeting.
Further, Sollund stressed that the work on transfer pricing documentation, being led by former OECD head of transfer pricing, Joe Andrus, will be consistent with OECD guidance.
Intragroup services
According to transfer pricing expert, Mukesh Butani, the UN’s transfer pricing draft on intragroup services is “largely similar” to BEPS work under action 10, except in a few instances.
Butani, who is managing partner at BMR Legal, said that both texts adopt similar tests to determine if services rendered are chargeable or not, and have similar rules on services that are not chargeable, such as shareholder activities, duplicate activities, and incidental benefit/passive association benefits.
The UN rules also generally follow OECD rules, he said, on the method of charging for intragroup services; use of transfer pricing method; allocation keys; and low-value adding intragroup services, including safe harbors, services qualifying as low-value adding services, and audit thresholds.
One difference between the guidance, Butani said, is that the UN has proposed a hierarchy for selecting the most appropriate method. Under the UN draft, the comparable uncontrolled price (CUP) method is considered the most preferable method, followed by the cost-plus method, and finally the transactional net margin method (TNMM), Butani observed.
Another difference is that the UN draft addresses the applicability of the profit-split method to intragroup services where a two-sided analysis is required, such as cases where multiple related parties have contributed intangibles, Butani, said.
Also, the UN guidelines “have gone a step ahead” of the OECD rules, Butani said, by providing examples that illustrate the thresholds for the application of safe harbors in cases of low volume/minor expenses from both an inbound and outbound perspective. BEPS action 10 on low-value adding services contemplates including potential thresholds at step two of implementation, he noted.
Butani added that the UN draft contains several helpful examples to illustrate key concepts of the guidance, such as shareholder services, duplication of activities, application of transfer pricing methodologies, appropriate allocation keys, and safe harbors.
UN model tax treaty updates
At the October 2015 meeting, committee member Henry Louie, who is US deputy to the international tax counsel, led a discussion on proposed modifications to Article 1 of the UN model tax treaty and its commentary to clarify the application of treaties to payments made through hybrid entities.
Following the discussion, Louie agreed to make further revisions to the proposed new commentary to clarify that if a source country is party to a payment to which two treaties apply, the state should comply with both treaties and hence charge the lower withholding tax rate; that relief would be given by the source state only to income taxed by the other contracting state; that provision should be made for the competent authorities to agree on how the hybrid rules should work in practice; and that clarify that source states should only give relief once in relation to the same income.
Committee discussions also addressed clarifying “connected projects” under Article 5 and “auxiliary activities” under Article 8 of the UN model; Article 12 on royalties; and a new article on taxation of technical services.
The discussion on royalties concerned clarifications to the meaning of the term “industrial, commercial or scientific equipment” in the Commentary on Article 12, and also dealt with the issue of coverage or otherwise of software related payments under the article.
The committee decided to create a new subcommittee on royalties to further investigate both of these issues and report back at the next committee meeting.
The committee also decided at the meeting to adopt the draft Practical Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries, with minor revisions.
Extractives industries
A subcommittee addressing special issues associated with the extractives industry presented three guidance notes for approval: an overview note on extractive industries taxation issues; a guidance note on selected tax treaty issues in relation to the extractive industries, and a guidance note on capital gains taxation and taxation of indirect asset transfers.
All three guidance notes were adopted, though revisions were made to the note on treaty issues. A draft guidance note on the tax treatment of decommissioning for the extractive industries was submitted for comment.
A paper addressing the pros and cons of arbitration was also presented at the October meeting. Following discussion, a subcommittee was set up to examine dispute resolution options such as improving the mutual agreement procedure, arbitration, non-binding forms of dispute resolution, and advance pricing agreements.
Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
See:
- Subcommittee on Extractive Industries Taxation Issues for Developing Countries E/C.18/2015/CRP.2)
- Presentation
- Attachment 1: Overview Note on Extractive Industries Taxation Issues Attachment
- Attachment 2: Note on Capital Gains Taxation and Taxation of Indirect Asset Transfers
- Attachment 3: Note on Selected Treaty Issues in Relation to the Extractive Industries
- Attachment 4: Guidance Note on the Tax Treatment of Decommissioning for the Extractive Industries
- Attachment 5: Overview Note on Value-Added Tax in the Extractive Industries
- Attachment 6: Draft Outline of Guidance Note on Negotiation and Renegotiation of Contracts
- Attachment 7: Draft Outline of Guidance Note on Permanent Establishment Issues for the Extractive Industries
- Possible Joint Actions by the Subcommittee on Article 9 (Associated Enterprises): Transfer Pricing and the Subcommittee on Extractives Industries Taxation Issues for Developing Countries (E/C.18/2015/CRP.3:)
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