Weekly transfer pricing roundup – 03 April 2017

We had an interesting week in store with the OECD giving us an update on its tax agenda (see article below). The Amazon case is still getting a lot of airtime but nothing new from last week on that. Don’t worry thought, a lot of other things are going on which I have tried to capture below.

OECD officials provide update on international tax agenda (MNE Tax)

“… Jefferson Vandervolk, Head of the OECD’s Tax Treaty, Transfer Pricing & Financial Transactions Division, reported that the OECD hopes to complete by June revised discussion drafts on the attribution of profits to permanent establishments (PEs) and the transactional profit split method.

This work is being done through Working Party 6 of the OECD Committee on Fiscal Affairs (WP6) in its inclusive framework format, so all 94 members are participating in the standard setting on an equal footing, Vandervolk said.

An important goal of the revised PE guidance is to clarify that there is no double taxation of profits in source counties as result of the interaction between Articles 7 and 9 of the OECD Model Tax Convention, Vandervolk said. The guidance will also suggest approaches for countries to minimize compliance and administrative burdens, he said.

Revised guidance on the transactional profit split method will focus on when the method is the most appropriate method and how to apply the method in particular circumstances, he said.

WP6 is also working on implementation guidance for hard-to-value intangibles, Vandervolk reported. “We are close to finalizing a draft for public comment,” he said.

Further, the OECD aims to release guidance on the transfer pricing of financial transactions by this summer, he said. Vandervolk said the guidance will include discussion on how to accurately delineate a transaction in the captive insurance area.

A new consolidated version of the OECD transfer pricing guidelines is also being prepared that will incorporate the transfer pricing changes made in the final BEPS reports, Vandervolk said. The amendments to chapter 9 on business restructuring are expected to soon be considered by the OECD Council, he said…”

I can’t wait for the new profit split guidance, but I am somewhat worried that it may be more of the same and not enough guidance. But let’s see, it is always easier to be a critic than come up with a solution. 

‘DEMPE’ No Substitute for Functional Analysis: McDonald (BNA)

“Don’t focus too much on new language in OECD guidelines that refer to development and exploitation of intangibles, a U.S. Treasury economist warned tax administrations, multinational companies and their advisers.

The amended guidelines introduce a new analysis and a new acronym—DEMPE, for the “development, enhancement, maintenance, protection and exploitation” of intangibles—that has given the concept too much weight, MIchael McDonald, an economist in Treasury’s Office of Tax Analysis, told a conference March 28.

“One concept that not only runs through the intangibles chapter but the rest of the guidelines is ‘let’s not get hung up on labels,’” he said. “When you get hung up on labels, sometimes you take your eye off the ball.” …”

I couldn’t agree more. It is good to have the DEMPE functions as it does bring these elements to the forefront but if there is more to be discussed, that forms part of the value chain, surely this should not be forgotten or made to fit certain labels just because. There is no reason why we cannot have a functional analysis that discusses DEMPE functions (and economic analysis), but also other relevant points.  

There are similar issues with ‘classifications’, sometimes one label just doesn’t seem to work and to make sure we apply the most appropriate method (and potentially profit level indicators) we should maybe consider alternatives or combinations.

Also see my blog post on ratio analysis techniques which discusses alternative ratios should you be in a jam.

Chile Leads Region to Test Companies’ International Tax Links (BNA)

“Chile is leading a regional push across Latin America to clamp down on tax avoidance and profit-shifting by multinational and local firms, with the country’s tax authority making companies with interests and assets one of its priorities for inspections this year.

Outlining its tax enforcement plan for 2017 on March 28, Servicios de Impuesto Internos (SII) said international inspections will be one of its priorities this year, highlighting the issues of transfer pricing and passive incomes received from companies outside Chile, including controlled foreign corporations.

This year will be the first year the authority fully adopts a risk-based tax compliance model, focusing on those taxpayers most likely to pay less than what they should…”

And another country focusing on transfer pricing and profit shifting. I think it would be easier to list the countries that are not focusing on this (I might even have made this joke before). But then again, I would have less to write about.

China’s SAT Has Luxury Goods Manufacturers in Crosshairs (BNA)

“Luxury multinational groups operating in China face a daunting transfer pricing environment as the nation’s tax officials apply transfer pricing analyses that give foreign luxury goods subsidiaries in that country a bigger share of global group profits.

China’s tax authorities are using the profit-split transfer pricing method more often. Profit split, a two-sided transfer pricing method, is often preferred by tax authorities who are concerned that traditional one-sided bench-marking approaches like the transactional net margin method (TNMM) allow companies too much control over where to place profits in a multinational group…

China’s State Administration of Taxation has adopted a “special items” file for value chain reporting.

A multinational company must describe the physical flow of goods and cash within the group, as well as allocation principles used and the actual results of group profit allocations among the members of the global value chain…”

Where the profit split method is the most appropriate method, this shouldn’t be a concern, but a tax authority shouldn’t just ignore a method because it doesn’t like the result.

Hopefully the new guidance on profit split will help to clarify this. If you do find yourself in such discussions, it may be helpful to look at past trends for the entity we applied a TNMM to but then also look at the other side. Yes, transfer pricing can be one-side but once we go into defence mode, we may want to check if there is merit in such arguments. As you know, should we apply a TNMM to each side of the same transaction, it is likely there is some profits left over and so there should be. This additional profit is usually attributable to entrepreneurial functions, IP, and the like but if the additional profit may be attributable to other things, there might be a question if the other party should  not also share in this. 

Before I get carried away too much, I will leave it at that. Have a great week.

What are your thoughts?

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