city buildings

Perspectives

The new transfer pricing landscape

How will the new guidance impact your company?

Get the latest information on transfer pricing.

BEPS: TP landscape and practical guide (November 2015)

In this book, the transfer pricing professionals of Deloitte have attempted to provide practical considerations in answer to that question. The nine articles in this collection each address a specific transfer pricing issue, providing an overview of the changes wrought by the new guidance and practical recommendations for taxpayers who will find themselves navigating the new transfer pricing environment.

  • Accurate delineation of the transaction and risk
  • Location-specific advantages
  • Passive association
  • Intangibles
  • Hard-to-value intangibles
  • Low value-adding intragroup services
  • Cost contribution arrangements
  • Transfer pricing documentation and country-by-country reporting
  • Dispute resolution mechanisms

Accurate delineation of the transaction and risk

The changes to Chapter I of the Transfer Pricing Guideline provide a revised interpretation of the arm’s length principle predicated on an expanded view and analysis of the economic substance of a controlled transaction. The expanded analysis required to determine whether a controlled transaction has economic substance involves a significantly more granular functional and risk analysis, referred to as “accurately delineating the actual transaction.” 

Under the new guidance, a contractual allocation of risk (and associated expected return) will be respected if and only if each party contractually allocated a risk is considered, through the accurate delineation analysis, to control their allocated risk and to have the financial capacity to bear the risk. The analysis of risks and of the functional control of risks thus becomes a pivotal element of the expanded functional analysis required under the new guidance.

To read the rest of the article, download the full collection at the top of the page.

Back to top

 

 

 

city and the shadow of a girl

Location-specific advantages

Location-specific advantages or LSAs are those location-specific market features and/or factors of production that enable a firm to achieve an improved financial outcome from the provision of the same product or service relative to alternative locations. The concept may include access to skilled labor, incentives, market premium, access to growing markets, superior infrastructure, and cost savings.

The new guidelines focus on two types of LSAs:

Location savings: These arise from cost savings due to differences in the cost of operations (arising from lower labor costs, real estate costs, etc.) between high-cost and low-cost jurisdictions.

Other local market features: These are attributes of local markets (such as purchasing power and product preferences of households in the market, growth rate of the economy adding to increased demand for the products, and degree of competition in the market) that may allow a company to obtain a price premium for its products and/or gain access and proximity to growing local and regional markets, allowing it to gain a competitive advantage through scale economies in sale or production.

Although the guidelines do not provide a formal definition of LSAs, they do provide guidance on the concept of location savings and refer to other local market features that are synonymous with the concept of LSAs. This article addresses some key issues in the guidance related to LSAs and compares it to the positions adopted by China and India.

To read the rest of the article, download the full collection at the top of the page.

Back to top

City

Passive association

It sometimes takes only subtle changes in tax law or guidance to cause significant practical consequences for taxpayers. The OECD’s view on how the arm’s length principle applies to estimating the creditworthiness of affiliates, to be set out in just a few additional paragraphs in Chapter I of the Transfer Pricing Guidelines, has not necessarily been a headline issue for the OECD BEPS project.

However, given the vast flows of debt funding within multinational groups, along with the common use of parental guarantees to allow subsidiaries to access local debt markets, any changes may have significant potential ramifications. It may also create many practical interpretation challenges for multinational enterprises. This uncertainty may raise the likelihood of more tax disputes between taxpayers and revenue authorities and also between revenue authorities.

To read the rest of the article, download the full collection at the top of the page.

Back to top

Man standing

Intangibles

This article looks at the new guidance on risk consistent with changes to Chapter I—the returns to capital—and place significant emphasis on the returns to the important functions related to the development, enhancement, maintenance, protection and exploitation of intangibles, and discusses how the new guidance will likely drive significant changes to current practices.

In most respects, the new guidance is unchanged from the previous draft. It adopts a broad definition of intangibles to preclude arguments that valuable items fall outside the scope. This expansive approach is similar to that of recent domestic rule-making in many countries.

The new guidance defines an intangible as something:
  1. That is not a physical asset nor a financial asset; 
  2. That is capable of being owned or controlled for use in commercial activities; and
  3. Whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. In commercial terms, this would include (but not be limited to) “intellectual property.”

To read the rest of the article, download the full collection at the top of the page.

Back to top

City

Hard-to-value intangibles

The hard-to-value intangibles recommendations included in the final report on BEPS Actions 8-10 are intended to address perceived information asymmetries between tax administrations and taxpayers whereby tax administrations may lack access to information, be too reliant on “specialized knowledge, expertise, and insight” provided by the taxpayer, or be incapable of determining whether the differences between projected results used to set the transfer pricing (ex-ante) and the actual results (ex-post) were due to unforeseen developments or faulty transfer pricing.

The OECD initially considered the use of special measures that may have operated outside the arm's length principle, including the recharacterization of intangible transactions and the application of other anti-abuse provisions. However, the OECD Secretariat instead adopted an approach consistent with the US commensurate with income rules, which are deemed to be consistent with the arm’s length principle.

To read the rest of the article, download the full collection at the top of the page.

Back to top

girl and the city view

Low value-adding intragroup services

For efficiency reasons, the headquarters of multinational enterprises (MNE) often provide affiliates with a variety of intercompany support activities. Typically, these services fall into one of the broad categories of support, including human resources, finance, information technology, legal services, and marketing. With the rise in volume of cross-border transactions and intensifying competition among various MNE groups, companies often centralize the entire range of intragroup services in a single low-cost location to bring efficiency and avoid duplication of services. This trend led to the creation of intragroup shared service centers.

The OECD’s final report on Actions 8-10 of the BEPS project, Aligning Transfer Pricing Outcomes with Value Creation, includes a section on “Low Value-Adding Intra-Group Services—Revisions to Chapter VII of the Transfer Pricing Guidelines.” This guidance introduces an elective, simplified approach to determining whether the service charge is due (the benefit test) and calculating the arm’s length charge in the case of low-value-adding services.

To read the rest of the article, download the full collection at the top of the page.

Back to top

City

Cost contribution arrangements

Cost contribution arrangements (CCAs) are contractual arrangements entered into to allow parties to share the contributions and risks involved in either:

  1. The development, production, or acquisition of intangible or tangible assets, or
  2. The execution of services, with an expectation that the parties will enjoy the anticipated benefits to be derived from their contributions equitably.

The OECD's new transfer pricing guidelines may require participants that provide funding to significantly increase substance around such arrangements and, in many cases, to change the method of valuing CCA contributions. Companies may find that the new guidelines eliminate much of the economic benefit of these arrangements in some situations.

To read the rest of the article, download the full collection at the top of the page.

Back to top

City

Transfer pricing documentation and country-by-country reporting

The revised Chapter V of the OECD’s Transfer Pricing Guidelines contains new standards for transfer pricing documentation. The guidelines recommend that individual jurisdictions adopt a three-tiered approach to transfer pricing documentation:

  • A master file with global information about a multinational corporation group, including specific information on intangibles and financial activities, that is to be made available to all relevant country tax administrations;
  • A local file with detailed information on all relevant material intercompany transactions of the particular group entity in each country; and
  • A country-by-country report of income, earnings, taxes paid, and certain measures of economic activity.

To read the rest of the article, download the full collection at the top of the page.

Back to top

City

Dispute resolution mechanisms

The goal of Action 14, "Making Dispute Resolution Mechanisms More Effective," is to develop solutions to address obstacles that prevent countries from resolving treaty-related disputes under mutual agreement procedures (MAP), including the absence of arbitration provisions in most treaties, and the fact that access to MAP and arbitration may be denied in certain cases.

Although Action 14 is directed at tax authorities, taxpayers could benefit significantly from these actions by permitting timely resolution of disputes consistent with double tax treaties and the reduction in the number of cases of double taxation.

The Action 14 report includes references to Action 15, “Developing a Multilateral Instrument to Modify Bilateral Tax Treaties,” which will be critical to implementing the recommendations of Action 14. The multilateral instrument negotiations, which will include mandatory binding arbitration, have recently been joined by the United States.

To read the rest of the article, download the full collection at the top of the page.

Back to top

City
Did you find this useful?