BEPS Action Plan: Action 9 – Transfer pricing and risks/capital

Action 9 of the OECD BEPS Action Plan is designed to develop rules to prevent base erosion and profit shifting through the transfer of risks among — or the allocation of excessive capital to — group members. We comment on this action here and provide links to additional content.



16 October 2015

One key aspect of the Final Report on Actions 8-10 is the guidance provided in regard to the relationship between the functions performed and corresponding allocation of returns...

specifically, the guidance provides that capital-rich entities that do not perform any relevant economic activities and do not exercise control over the financial risk will not be allocated any excess profits and will not be entitled to any more than a risk-free return.

As mentioned in the Actions 8 to 10 Executive Summary of the Final Report, such guidance is linked with other Actions, such as ensuring that capital-rich entities without any other relevant economic activities (i.e., “cash boxes”) will not be entitled to any profits beyond those that appropriately remunerate their contributions.

See further our Tax Insights from Transfer Pricing of 16 October 2015[PG1] .


5 October 2015

Perhaps the major theme of the whole of the final TP package relates to aligning the substance (i.e., real value contribution) with the location of profits for tax purposes and…

there has been a particular emphasis on the treatment of the returns associated with risks, capital and intangibles.

In particular, the provision of funding alone without control over the underlying risks does not entitle the funder to anything above a risk-free return. In particular the OECD has gone further than in previous drafts to give specific examples of functions which do not evidence control. These include: meetings organised for formal approval of decisions that were made in other locations, minutes of a board meeting and signing of the documents relating to the decision, and the setting of the policy environment relevant for the risk.

Other transfer pricing work on the delineation of transactions, intangibles, Cost Contribution Arrangements, the transactional profit split method, commodity transactions and “low-value adding intra-group services” transactions is covered in the sections on Action 8 and Action 10.


7 July 2015

The OECD’s public consultation on a cluster of transfer pricing matters on 6-7 July has indicated …

that some of the more radical proposals like special measures will not be taken forward or that others will be delayed for further consideration beyond the September deliverable (see further our comments on Action 10).


19 December 2014

The OECD has invited comments from interested parties on a discussion draft on revisions to Chapter I of the Transfer Pricing Guidelines (Including risk, recharacterisation and special measures). This work relates to Actions 8, 9 and 10 of the BEPS Action Plan (see our Action 8 comments).


3 June 2014

The OECD’s Annual Conference in Washington DC provided an indication that …

a discussion draft on risk and capital will be issued after the G20 meeting in November 2014 with the likely first consultation in December 2014/January 2015.


14 November 2013

Risk, recharacterisation and transfer pricing methods were highlighted as BEPS-related issues at the public consultation on transfer pricing at the OECD on 11/12 November and it was …

recognised that the bearing of ‘real economic risk’ is not necessarily aligned with the performance of functions. It was also suggested that if risk is shared amongst members of a multinational group, the starting proposition should always (at least in the first instance) be the relevant legal agreements in place.

Delegates generally agreed that recharacterisation was a tool and must be applied cautiously. Specific concern was raised in the event that two tax authorities were to take opposing approaches to recharacterisation, with the potential risk of double taxation that would result and the lack of means to resolve it. It was recommended that recharacterisation must only occur in the limited circumstances as set out in the Transfer Pricing Guidelines.


2 September 2013

An approach which places more weight on any part of the ‘functions, assets, and risks’ model for determining compensation creates …

the potential for double taxation (as countries may seek to place undue reliance on whichever of those factors favours their jurisdiction). The action talks about ‘inappropriate returns’ but that involves judgement on what is appropriate. It will therefore be important for any changes in this area to represent clear standards which can be – and are in practice – uniformly applied by tax authorities.


5 August 2013

As with the contribution of intangibles and other valuable assets, a reward is required for funding risky ventures and that should …

also apply in the case of transactions involving the provision of capital or the assumption of the associated risk.

However, the OECD is giving consideration to measures addressing what might be regarded as ‘inappropriate returns’, including transactions involving the returns which can accrue to an entity solely based on its assumption of risk or provision of capital.


19 July 2013

Rules are to be developed to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. The work …

(to be completed within two years) will focus in particular on ensuring that inappropriate returns do not accrue to an entity solely because it has contractually assumed risks or has provided capital, implying a clear ‘substance’ agenda. The rules to be developed will also require alignment of returns with value creation.