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May 29, 2014
Tax Analysts Exclusive: Revised Transfer Pricing Discussion Draft Kept Under Wraps
by Margaret Burow

Full Text Published by Tax Analysts®


On or around April 18, the OECD released a copy of a revised draft on action 13 (transfer pricing) of the base erosion and profit-shifting action plan to working party members and official consultative members in advance of the May 19 public consultation on transfer pricing documentation and country-by-country (CbC) reporting.

The document instructed delegates to review the revised draft and provide written comments on or before May 1 and to bring their own copies of the draft to a meeting, the date and location of which are unknown, because there would be no printed copies available in the meeting room.

The revised draft has not been officially released to the public, but it was unofficially released to some stakeholders on or around May 17. The number and identity of those stakeholders are largely unknown, but some of them may have received copies directly from Joseph Andrus, head of the OECD's transfer pricing unit. Andrus told recipients that they could share the revised draft with other select stakeholders but that they could not publish the document. Sources told Tax Analysts that the draft was released to improve the dialogue at the May 19 consultation.

Tax Analysts obtained a copy of the document, titled "Revised Draft Revision of Chapter V of the Transfer Pricing Guidelines," dated April 18 and marked confidential. It contains redline changes and states that it reflects comments received in response to the release of the transfer pricing discussion draft on January 30 and discussions held during the meeting of Working Party 6 on March 24.

Some of the stakeholders who are believed to have received copies of the revised draft were reluctant to comment on the record.

Tax Analysts reached out to the OECD for comment on why the revised draft was distributed only to select stakeholders. Marlies de Ruiter, head of the Tax Treaty, Transfer Pricing and Financial Transactions Division at the OECD's Centre for Tax Policy and Administration, said that when the January 30 discussion draft was released, Working Party 6 recognized that the draft was in a relatively early stage of development but that the group decided to release the draft in order to "create the possibility for an interactive dialogue."

The draft was later revised based on stakeholder comments, and OECD officials discussed the revisions during an April 2 OECD webcast; the revisions were highlighted in the press, de Ruiter said. She added that Working Party 6 delegates agreed that they and the secretariat could actively engage with stakeholders on the basis of the webcast and the draft. However, Working Party 6 recognized that the time needed to publish the revised draft and receive comments on it was too short and that official release of the revised document wouldn't be feasible.

After the May 19 public consultation, Working Party 6 delegates made additional changes to the discussion draft, de Ruiter said. The latest draft will soon be presented to Working Party 6 for final approval, and once approved, the draft will be presented to the CFA. The OECD does not intend to officially release the draft before the September release of the 2014 deliverables, she said.

The quality of the discussion drafts and consultations would not have been possible but for the OECD's ability "to use quick ways of messaging and interacting," de Ruiter said, adding that the OECD has heard from some stakeholders that this approach has been highly appreciated.

Following is an overview of some of the more substantive revisions to the discussion draft.


Section B. Objectives

The revised objectives of the transfer pricing documentation requirements clarify that tax administrations will be given the required information to commence, rather than conduct, a transfer pricing audit, "although it may be necessary to supplement the documentation with other information as the audit progresses."

A similar change was made in paragraph 13 of section B.3. so that the information requested is to be used to begin, rather than conduct, a thorough transfer pricing audit.

As Andrus said in his opening remarks during the public consultation, the OECD's requirements for transfer pricing documentation will include a master file, local file, and CbC report. The revised draft says the CbC report must contain "certain information relating to the global allocation of the [multinational enterprise's] income and taxes paid, together with certain indicators of the location of economic activity within the MNE group."


Section C.1. Master File

Paragraph 18 of the January 30 discussion draft was revised to state that "in general, the master file is intended to provide a high-level overview in order to place the MNE groups' transfer pricing practices in their global economic, legal, financial, and tax context." The draft says the master file generally would not exceed 50 to 60 pages for a large MNE.

A new paragraph 20 added to this subsection states that taxpayers will "have the option to prepare the master file either for the MNE group as a whole or by line of business or product group, depending on which presentation would provide the most relevant transfer pricing information to tax administrators."

Delegates were asked to provide their views on some commentators' suggestion that MNEs should be able to limit business line information to countries where the business line is present, because that flexibility could make the filing and sharing processes more complicated.


Section C.3. CbC Reporting

New paragraphs 24 and 25 were added to a new subsection on CbC reporting.

Aggregate countrywide information about the global allocation of income, taxes paid, and specific indicators of the location of economic activity among countries in which the MNE group operates will be required as part of a CbC report.

A list of all the MNE group members for which financial information is reported will be required and should include the country of incorporation, if different from the country of residence, as well as the nature of the principal business activities carried out by each entity.

This subsection now states that the information in the CbC report "will be helpful for high-level risk assessment purposes" but that it "may also be used by governments to carry out economic and statistical analysis." However, the information should not be used as a substitute for a detailed transfer pricing analysis that is based on a full functional and comparability analysis, it says.

The information would not alone constitute conclusive evidence of whether transfer prices are at arm's length. Further, tax administrations would not be able to use the information "to propose transfer pricing adjustments based on a formulary apportionment of income."


Section D.3. Materiality

The section on materiality limits the transactions that would be reported in the local file to those that are "sufficiently material." The revised draft states that materiality can be measured by tests such as whether the transactions exceed a percentage of revenue, a percentage of costs, or a fixed amount.

The revised language provides that the same measure of materiality may not be appropriate for each country, so "individual countries should establish their own materiality standards for local file purposes, based on local conditions."

The revised draft also adds that the CbC report "should include all countries in which the MNE group has an entity resident for tax purposes, regardless of the size of the business operations in that country." No new proposals were made regarding the language to be used in the local file.


Section D.6. Language

A hotly contested issue raised during the public consultation involves the language in which information should be prepared and submitted. The revised draft states that in general, the master file and CbC report should be prepared and submitted by all tax administrations in English "or the principal operating language of the MNE group." Local country tax administrations would still have to make specific requests for translation.

Delegates were asked to comment on the business community's varied views regarding the preferred language.


Section D.8. Confidentiality

The application of this subsection was expanded to include the master file, local file, and CbC report. The revised draft also refers to the OECD's "Keeping It Safe" guide for rules and practices that must be in place to ensure the confidentiality of taxpayer information provided under exchange of information instruments.

Section D.9. Other Issues

The revised draft asks delegates whether paragraph 42 on the use of comparables in the January 30 discussion draft should be retained or deleted based on concerns expressed by the business community over its inconsistency with paragraph 3.35 of the transfer pricing guidelines.

Section E. Implementation

Delegates were also asked to comment on, and indicate their preference among, five possible approaches in the CbC report for the filing and sharing of information. The advantages and disadvantages of some of the approaches are discussed in the revised draft.

The five approaches include:

  • The filing of the master file and CbC report in the local jurisdiction by the local affiliate. Some of the advantages of this approach include the timeliness of the provision of information, reduced compliance burdens (with the responsibility to comply placed on the local entity's management), and broader distribution of information to non-treaty countries. The broader distribution of information "would be a plus in terms of the ability of the G-20 and OECD countries to suggest that the BEPS Project is doing practical things to help developing countries," the draft says. It also states that some countries had the perception that their agreement to a slimmed-down version of the CbC report was a quid pro quo for the acceptance of local filing requirements by other countries. The disadvantages include the lack of confidentiality of data, reluctance to share information, and disincentives for countries to qualify for and join the multilateral convention.
  • The filing of the master file and local file in the local jurisdiction, with the CbC report filed only in the parent country and shared under treaty provisions on the exchange of information. The advantages of this approach include a reduced administrative burden, confidentiality protection, the incentive for countries to qualify for and join the proposed multilateral convention, and the acceptance of different filing requirements applicable to the CbC reports and master files. On the other hand, this approach would create delays and pose the risk that not all countries would be able to gain access to the CbC reports. Reliance on treaty mechanisms could give countries the opportunity to exempt resident companies from the requirement to file a CbC report or lead countries to determine for themselves what information is relevant and what should be released to treaty partners. The draft states that those disadvantages could be overcome by requiring that the CbC report be filed at the highest point in the corporate organizational structure where a constituent entity is required to file; giving local authorities the power to require the filing of the CbC report directly by a company if access is unavailable under treaty mechanisms; requiring the CbC report to be considered relevant to any country in which the MNE has a local entity; and requiring the automatic exchange of information under the proposed multilateral convention.
  • The sharing of the master file and CbC report as prescribed by treaty. According to the revised draft, using this approach appears to add to the administrative burden, which would not be justified, given that the level of concern over confidentiality surrounding the master file is not as great as that surrounding the CbC report.
  • The use of the multilateral convention to prescribe the obligations associated with CbC reporting.
  • The deferral of the implementation of the new CbC rules until 2015 to allow for a more thorough review of the implementation mechanisms.

In the meantime, the OECD would consider electronic filing and sharing systems, the confirmation of actual versus perceived administrative roadblocks, a more favorable administrative structure, and the development of model documentation legislation to standardize an approach to CbC reporting.

Section F. Monitoring

A new section regarding the monitoring of implementation mechanisms was added to the draft. To promote continual improvements to those mechanisms, the OECD should revisit documentation standards before the end of 2020, the revised draft says.

Annexes I, II, and III

The draft states that the annexes reflect tentative decisions made at the March meeting of Working Party 6. It requests comments on whether to include transactional reporting fees for intragroup services paid and received on a CbC basis in the CbC reporting template, as suggested by some delegates after the March meeting.

Annex I was revised to require a supply chain chart that shows "the group's five largest products and service offerings plus other products amounting to more than 5 percent of group turnover." The requirement that the MNE list the title and country of principal office of the 25 most highly compensated employees by business line was deleted.

The reporting MNE would also include a description of the group's existing unilateral advance pricing agreements and other tax rulings on the allocation of income among countries. The last three bullet points in the January 30 draft regarding the MNE's financial and tax positions were deleted.

Revised Annex II would require a detailed description of the business and business strategy pursued by the local entity and a list of key competitors. Only material controlled transactions and a CbC breakdown of payments and receipts for each transaction involving the local entity would be reported. The requirement to identify and describe any transactions that directly or indirectly affect pricing was deleted.

Copies of all material intercompany agreements concluded by the local entity, as well as copies of existing APAs (unilateral, bilateral, and multilateral) and other tax rulings on the reported transactions, are required.

Annex III, which contains the model template and instructions for CbC reporting, was also revised. There are now two parts to the template -- the first consisting of an overview of the allocation of income, taxes, and business activities on a CbC basis, and the second of information on constituent entities of the MNE group.

The revised general instructions propose three alternatives for the definition of a constituent entity, which could include a separate business line of the MNE group that is:

  • an associated enterprise to the reporting MNE within the meaning set out in the glossary of the transfer pricing guidelines;
  • directly or indirectly owned at least 50 percent by the reporting MNE; or
  • in the consolidated financial statement of the reporting MNE.

Information on the permanent establishment of a constituent entity "should be reported by reference to the country in which it is situated and not by reference to the country of residence of the constituent entity of which the permanent establishment is a part."

Language about the source of data for the CbC report was added. It states that the reporting MNE should consistently use the same sources of data from year to year. The MNE will be able to choose data from consolidated reports, separate entity statutory financial statements, regulatory financial statements, or internal management accounts.

Reconciling the information with the consolidated reports would not be required. Amounts taken from statutory financial statements would need to be translated into the functional currency of the reporting entity using the yearly average conversion rate. Adjustments would not be made for country differences in accounting principles. A description of the sources of data used to prepare the report would be included in the additional information section of the report.

The first part of the template includes eight columns and would require a listing of the countries in which each constituent entity is resident and a separate listing for all constituent entities deemed nonresident in any country by the reporting MNE. The applicable income tax treaty or OECD model treaty tiebreaker rules would apply to determine the country of residence if an entity is resident in more than one country.

The second, third, and fourth columns would be used to report revenues, broken down by related and unrelated party revenues and the sum of those revenues, respectively. Payments from other constituent entities that are treated as dividends in the payer's country would be excluded from the fourth column. The remaining paragraphs in the January 30 draft regarding revenues were deleted.

Profit or loss before income tax is to be reported in the fifth column for all constituent entities resident in the relevant country, but that amount need not reflect the amount on the same financial statement on which revenue was to be reported or reflected in the functional currency of the constituent entity, as stated in the January 30 draft.

The sixth column would include income tax paid. The instructional paragraphs in the January 30 discussion draft regarding incomes taxes were deleted and replaced. The amounts in the sixth column must reflect amounts paid by a constituent entity to its country of residence and all other countries, as well as taxes withheld by other entities on payments to a constituent entity.

A new seventh column was added to the template to include income taxes accrued for the current year by all constituent entities resident in the relevant country, but it does not include deferred taxes or provisions for uncertain tax liabilities. The eighth, ninth, and 10th columns of the revised template are to include stated capital and accumulated earnings, number of employees, and tangible assets other than cash and cash equivalents, respectively. The columns for royalties, interest, and service fees in the January 30 discussion draft have been deleted.

The revised second part of the template contains four columns. In columns one and two, a reporting MNE would list, on a CbC basis and by legal name, all constituent entities that are resident in the relevant country. If the country of organization or incorporation is different from the country of residence, it should be listed in the third column.

In the fourth column, the reporting MNE would be required to identify the business activities conducted by the constituent entity of the relevant country. Instead of using a code, the reporting MNE could check one or more listed business activity boxes. The activities listed are the same as those included in the January 30 discussion draft.


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