BEPS Action Plan: Action 13 – Transfer pricing documentation

We consider here action 13 of the OECD's BEPS Action Plan, aimed at re-examining transfer pricing documentation requirements — and in particular providing for more information from taxpayers. Such information will offer useful indicators for risk assessment and allow tax administrations to better focus their limited resources.

 

Updates

 

24 September 2014

The proposals now agreed by the G20 on the transfer pricing documentation master file and local file are broadly in line with what has already been announced while on country-by-country reporting…

The report now confirms that the data points that will be required to be reported for each country will be the following:

  • Revenues (from both related and unrelated party transactions)
  • Profit before income tax
  • Income tax paid (cash basis)
  • Current year income tax accrual
  • Stated Capital
  • Accumulated earnings
  • Number of employees
  • Tangible assets (excluding cash and equivalents)

The clear implication is that the template is designed to highlight those low-tax jurisdictions where a significant amount of income is allocated without some “proportionate” presence of employees. What this means in practice is that, there will be pressure to assure that profit allocations to a particular jurisdiction are supported by the location in that State of sufficient appropriately qualified employees who are able to make a “substantial contribution” to the creation and development of intangibles. Concerns regarding confidentiality of this data and the potential for adjustments by tax administrations based on a formulary apportionment approach leading to many more transfer pricing controversies, have already been noted.

The OECD has also noted that some countries (for example Brazil, China, India, and other emerging economies) would like to add further data points to the template regarding interest, royalty and related party service fees. Those data points will not be included in the template in this report, but the compromise is that the OECD has agreed that they will review the implementation of this new reporting and, before 2020 at the latest, decide whether there should be reporting of additional or different data.

The OECD does not yet have absolute consensus on the arrangements for the sharing of master file and CbC information although they are seeking to finalise those arrangements by January 2015, including confidentiality issues with indications that information will only be exchanged pursuant to treaty or tax information exchange agreement provisions.

 

26 May 2014

The OECD’s webcast today suggested that Working Party WP6 was keen to provide a strong reminder that …

country-by-country (CbC) information is to be reported to tax authorities at a very high level and for risk assessment only. This is a quantitative exercise and not a qualitative one- so, for example, information on intangibles - which often not valued – would be required only in the master and local files as it was too much of a burden to require it compared to the benefit for risk assessment purposes.

The three-tier approach would need structured and careful implementation. The WP expects to deliver an implementation 'tool' in January 2015, setting out how sharing of the master file and CbC template would take place.

There would be a need too for an ongoing monitoring mechanism to assess implementation.

 

19 May 2014

The OECD public consultation on the discussion draft on transfer pricing documentation and country-by-country reporting …

added very little to the analysis of the responses and the interim announcement of changes that would be made.

It was confirmed that there were ongoing difficulties in agreeing the methodology for sharing the information and that this would be held over from the September 2014 deliverable.

 

2 April 2014

The second OECD BEPS update webcast provided confirmation of some of the changes to the country-by-country (CbC) and transfer pricing documentation proposals …

although the methodology for filing/sharing and the language for the master file and local file remain outstanding issues. In particular though:

  • CbC will not be part of the master file but a separate document
  • financial data reporting will be on an aggregate countrywide basis not entity by entity (including revenues, profit before tax, cash tax paid, current year tax accrual, numbers of employees, tangible assets, capital and retained earnings)
  • the transactional reporting requirement – for interest, royalties and other intercompany payments – will be removed from CbC (and will only be in the local file for entities doing business there)
  • the list of entities and permanent establishments (PEs) in each country will be required with the proposed nature of business codes
  • there will be an option to build from either statutory or other financial reporting so long as the method is applied consistently across the group and from year to year
  • there will be flexibility as to whether the master file is on a group-wide basis or by line of business
  • the intention will be made clear in plain language that the master file is for high level reporting
  • the need to report the 25 highest paid employees will be removed from the master file.

 

24 February 2014

In our response to the 30 January 2014 Discussion Draft, as a general matter, PwC supports the OECD’s work on simplification of transfer pricing documentation and the goal of increased transparency but …

PwC does not consider that the approach proposed achieves the stated goals of balancing “the usefulness of the data to tax administrators for risk assessment and other purposes with any increased compliance burdens placed on taxpayers” nor of increased transparency of information relevant to transfer pricing risk assessment. We consulted widely with clients on this and you’ll perhaps have heard more or contributed to our live webcast on this on 13 February for which a recorded archive version is now available.

We recognise the legitimate desire of tax authorities in jurisdictions around the world to have access to relevant tax reporting information. Further, we support the simplification of reporting and recognise that the use of tailored standard forms and questionnaires across jurisdictions enables information to be gathered more efficiently.

We’re concerned though with the speed with which these proposals are being developed. We commend the OECD’s efforts to engage business input, but we are concerned that the timing of this proposal will not permit sufficient opportunity for input from, and consultation with, the business community to ensure that the guidance ultimately adopted can be successfully implemented in practice. The OECD has, itself, acknowledged that the compressed time frame has allowed for limited consideration of the issues to date. Perhaps, then, given the significant impact this guidance will have on all parties, the OECD could consider issuing another draft and holding another consultation or comment period.

Aside from the speed with which the project is progressing, we have two additional specific concerns in relation to the proposals. First, we are concerned that the proposed two-tiered approach to transfer pricing documentation will result in a significant implementation and compliance burden on taxpayers which is out of proportion to any benefits that may be secured from the process. Second, we have concerns relating to the treatment of what may often be proprietary and sensitive information.

For the above reasons, PwC requests the OECD to seek:

  • a better cost/benefit balance with respect to the information to be gathered by taxpayers under these proposals;
  • a more stringent confidentiality regime - i.e., requiring the master file and CbC template to be submitted to the parent company’s home tax authority and distributed only through relevant provision and upon request (together with real sanctions for countries that violate confidentiality provisions);
  • uniformity, globally, in the implementation of the master file and CbC template, with this goal of uniformity being applied also to the contents of the local file of transfer pricing documentation;
  • a single commencement date for all countries adopting the requirements;
  • flexibility regarding the derivation and form of the data to be collected;
  • the application of materiality thresholds for small or low risk entities or transactions; and
  • improved dispute resolution mechanisms to address transfer pricing controversy, including improved arbitration provisions, potentially also including “baseball-style” arbitration.

 

31 January 2014

Multinational enterprises (MNEs) would face materially increased compliance burdens as a result of the OECD’s proposals if they remain in their current form ...

after the brief consultation period allocated. A discussion draft released on 30 January 2014 poses a number of difficult questions, to be answered by 23 February 2014. We recommend in our initial Insights bulletin full and active participation by all interested stakeholders.

The discussion draft requires a mandated list of documents to be included in a transfer pricing documentation package. Overall, this could result in a very short period for business to adjust to life with increased reporting obligations, including country-by-country information. The OECD will need to carefully consider whether the reporting of tangible property, number of employees and payroll expense in practice might lead to adjustments more in line with a formulary apportionment type of transfer pricing system, along with all the potential for increased disputes and double taxation that entails.

The OECD’s strategic objectives of making transfer pricing documentation more efficient and better targeted should be supported. The approach, as originally developed, sought to streamline and rationalise information requirements to benefit both tax administrations (i.e. with better information) and tax payers (i.e. by delivering a more efficient process). However, based on the proposals in the current discussion draft, it’s not clear that these goals have been achieved as, overall, the package seems somewhat one-sided with little clear benefit to business.

It will, in particular, be important to ensure that the consultation process is pursued to deliver as much flexibility as possible. Securing the confidentiality of information will also need to be a major priority.

The OECD statement in the draft that it will be giving further consideration to whether information relevant to other (non-transfer pricing) aspects of tax administration and the BEPS Action Plan should also be included in the common template means that the documentation requirements may be expanded well beyond transfer pricing risk assessment purposes.

You can hear more about these issues in our webcast of 13 February.

 

17 January 2014

A draft of the OECD’s recommendations on Action 13 is expected in February 2014 though there had been thoughts that it may be published to coincide with...

its first webcast to discuss BEPS progress on 23 January. The tentative timing of February was included in the OECD’s published calendar showing BEPS consultation stages taking place toward the end of 2013 and early in 2014. The date for the webcast was announced by the OECD on 13 January.

We expect the next public draft will be released in the first two weeks of February with three weeks for public comment prior to the Working Party 6 meeting in late March at which there is expected to be further opportunity for business to comment in person.

 

14 November 2013

At the public consultation on transfer pricing at the OECD on 11/12 November, Working Party 6 (WP6) sought to address the country-by-country reporting issues as well as wider issues surrounding the master/local file proposals...

The framework proposed by the OECD in the White Paper on transfer pricing documentation is a “two-tiered approach” which included the preparation of a detailed global master file, as well as country specific files. It is part of a risk assessment process but is increasingly becoming for multinationals a tool for avoiding penalties.

The primary objective of BEPS in requiring reporting information on a country-by-country basis is to enhance transparency for tax administrations alone.

Balancing the compliance costs for business is critical in both cases.

Business generally wants a standardised approach, with better rather than just more information. So, the template information should focus on the “bigger picture” (using information which is readily available), the master file requirements should not be so onerous and materiality should be taken into account.

A modulated approach, where less information is provided to enable quick implementation of the BEPS-related element may need to be adopted in meeting the September 2014 deadline.

 

4 October 2013

The OECD’s memorandum of 3 October 2013 on transfer pricing documentation and country-by-country reporting as part of Action 13 forms...

another key part of the risk assessment process. The key themes of substance, transparency and risk are consistent with other recent OECD publications and areas of the BEPS Action Plan. Interestingly, the memorandum acknowledges that including information on other measures of economic activity may encourage “unwarranted reliance on formula-based income allocations”.

It may also result in taxing authorities asserting arguments based on abstract notions of comparability (consider gross marketing expenditures without an understanding of the industry or the expenditures relative to sales).

It also acknowledges, perhaps in response to comments received on the earlier OECD White Paper on Transfer Pricing Document that a key question yet to be answered is whether the required reporting of all these items of information will actually provide any relevant guidance for transfer pricing risk assessment.

Overall the Memorandum provides a clear indication of the type of information that is likely to be required in the coutry-by-country reporting template and raises key topics for discussion through the consultation process that should be considered as part of the broader BEPS landscape.

 

26 September 2013

In our response to the OECD’s consultation on its Draft Handbook on Transfer Pricing Risk Assessment, we noted the need for it to be...

consistent with conclusions resulting from the BEPS Action Plan. In particular, we related this to Section 2.2 of the Draft Handbook which is largely concerned with identifying related party payments that have the potential to shift income and erode the local tax base.

As currently drafted, paragraphs 147 and 148 of the Draft Handbook also state that businesses would welcome sharing risk assessment reports but stop short of recommending systematic sharing of reports in all circumstances. We strongly encourage a more definitive recommendation within the Draft Handbook for tax administrations to share risk assessment reports with taxpayers to encourage a principled, transparent process and ensure potential issues are addressed and resolved efficiently.

 

10 September 2013

It seems likely that the information to be stipulated by the OECD for these purposes will be somewhat rudimentary, involving the provision of …

data broken down by country on global income and taxes paid, according to a common template. For transfer pricing purposes, we believe it may be more useful if any requirements in that template were more narrowly focused on particular risks — particularly if it otherwise becomes an overly complex exercise to compile the data required.

We’re concerned that there is a great potential for this kind of information to be used inappropriately by tax authorities and/or become accessible by the public, where it could be misinterpreted or used anti-competitively.

We also believe that a surfeit of this type of basic information may not assist the process of resolving disputes. If any requirements are clearly targeted as a risk assessment tool rather than as an adjustment tool for field auditors, that should help address potential issues with the effective use of limited resources, a matter also clearly raised in the EU Joint TP Forum’s June 2013 Report on transfer pricing risk management.

 

19 July 2013

The Plan notes that asymmetries in information on TP between taxpayers and the tax administrations potentially enhance the opportunities for BEPS …

especially as a ‘big-picture’ view of the taxpayer’s global value chain is often not available. It is also noted the differences between countries and the requirements on TP documentation lead to significant costs for business. It is therefore proposed to re-examine TP documentation to ensure transparency for the tax administration, bearing in mind the costs for business. It is specifically noted that the rules to be developed will include a requirement that MNCs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. The work is to be completed within one year.



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