BEPS Transfer Pricing Update

Background

On 15 December, 2014, the OECD hosted a webcast to update the global tax community on progress under the Base Erosion and Profit Shifting (“BEPS”) Plan.  This year, the OECD produced 10 different reports (“BEPS Reports”) covering several actions specific to transfer pricing. This latest OECD webcast summarised efforts and achievements by the OECD on the BEPS Plan to-date, upcoming work on the BEPS Reports, and insights on soon-to-be-released reports.

Upcoming work in transfer pricing

The OECD designed the BEPS Plan to be an inclusive effort.  As such, consideration of stakeholder input has been built into the BEPS Plan timeline as a critical step towards building global consensus on each Action Item.  This latest webcast highlighted future steps to gain this consensus on several transfer pricing Action Items and associated reports.

1. Documentation and country-by-country (“CbyC”) reporting – The 2014 Report on Action Item 13 detailed the requirements to produce Master files, Local country files, and CbyC reporting.  Proposed financial disclosures stemming from the CbyC initiative has spurred significant debate and concern from industry.  Further guidance by the OECD will be published in February 2015 in an effort to ensure that business will be comfortable with the consistency, confidentiality and appropriateness of how tax authorities will use CbyC data.

2. Low value-adding services – In November 2014, the OECD published a consultation draft on pricing intra-group services that are of low value-add.  Because low value-add services are the most common intercompany transaction, the OECD will hear comments from business in order to refine its guidance in a final report.

A taste of drafts yet to come

In the latter half of the webcast, the OECD spoke briefly on forthcoming guidance on two particular areas of interest.

1. Transfer pricing – On 16 December, 2014, the OECD released for comment discussion drafts on commodity transactions and profit splits. A third transfer pricing draft on risk/re-characterisation is due by the end of December 2014. In the webcast, the OECD described the framework to evaluate whether a transaction was structured in harmony with the conduct of the parties (functions, assets and risks), and what transfer pricing approaches should be followed when there is discord between the transaction structure and the parties’ conduct.

2. Interest deductions – The webcast outlined two options to limit excessive interest deductions. The first is a group-wide test that limits intra-group interest deductions to a portion of real third party interest expense.  The UK introduced legislation to this effect in 2009.  The second option is a fixed ratio test, restricting interest deductions to a defined percentage of an entity’s earnings or assets.  Many OECD countries have introduced similar “Earnings Stripping” rules.  The OECD suggests a combined approach is adopted, allowing some flexibility to taxpayers. Details will be presented in a discussion draft due this week.

Issues to be considered

Transfer pricing touches on many of the BEPS Plan’s Action Items.  It remains to be seen what changes will be made following consultation on the 2014 Reports and further BEPS guidance.  Businesses with operations in Ireland and abroad will need to understand how future rules are drafted and adopted into law in Ireland as well as in foreign countries.

Watch for further transfer pricing guidance expected later this month and in early 2015.

How we can help

Our transfer pricing team will help you frame and understand the key value drivers of your business in a manner that supports a robust approach to transfer pricing. We will evaluate where profits from your international business will be taxed and on what basis. With a broad range of experience from Ireland, the US, Canada, South America and Europe, our team is well placed to advise you in how to meet these new requirements so you can remain focused on managing your business.