Latest raft of BEPS discussion drafts invite comment

The OECD has published the following discussion drafts as part of the BEPS project:

• Two discussion drafts on action 10 (to prevent the abuse of transfer pricing).
  • The first looks at rules to clarify the application of methods such as profit splits in the context of global value chains, to ensure transfer pricing outcomes are in line with value creation. The consultation considers: the difficulties that complex multinational enterprises face in finding comparable transactions to benchmark costs for arm's length pricing; and how to apply transfer pricing along global value chains, which the OECD describes as ‘the full range of firms’ activities, from the conception of a product to its end use and beyond’.
  • The second draft looks at difficulties in relation to the pricing of cross-border commodity transactions. More specifically, the consultation invites feedback on the following three issues: (1) the use of pricing date conventions, which allow the pricing date to be verified; (2) circumstances where other group companies in the supply chain (e.g. processing, transportation, distribution, marketing) make significant adjustments to the quoted price, or charge significant fees to the taxpayer in the commodity producing country; and (3) the involvement in the supply chain of entities with apparently limited functionality, which may be located in tax havens.
• A discussion draft on action 4 (interest deductions and other financial payments). This draft stresses the need to address BEPS using deductible payments such as interest that can give rise to double non-taxation in both inbound and outbound investment scenarios. It examines existing approaches to tackling these issues and sets out different options for approaches that may be included in a best practice recommendation. Law firm Pinsent Masons observed that the draft considers the pros and cons of group wide rules and fixed ratio rules and the different ways in which they could be implemented. The document also suggests that if ratio rules and interest allocation rules are insufficient on their own to tackle BEPS, the two types of rule could be combined. Partner, Heather Self said: ‘There is a real risk the cure could be worse than the problem. The outline proposals will involve onerous compliance burdens and in many cases will lead to double tax. This is not an acceptable outcome for a project which should be focused on preventing avoidance structures – the proposals should concentrate on abusive structures and not seek to impose a global regime for dealing with interest expense.’
• A discussion draft on actions 8, 9 and 10 (risk, recharacterisation and special measures). This draft is divided into two parts.  Part I contains a proposed revision to chapter I of the transfer pricing guidelines. The proposals emphasise the importance of accurately delineating the actual transactions, and include guidance on the relevance and allocation of risk, determining the economically relevant characteristics of the controlled transaction, and on recharacterisation or non-recognition of transactions. Part II of sets out options for some ‘special measures’, as envisaged in the BEPS action plan with regard to intangible assets, risk and over-capitalisation.  A series of questions relating to all the options has been set out, and responses to these questions will be taken into account when considering the appropriateness and design of each option. This action is focused on updated and expanded guidance on the allocation and transfer pricing of risk within a multinational group and also when it may be appropriate for taxpayers’ transactions to be ‘recharacterised’ by tax authorities and alternative transactions substituted for tax purposes. Writing for Tax Journal, Richard Collier and Aamer Rafiq (PwC) noted that the proposals contain ‘a broad and radical set of proposals which, if enacted, would lead to material change in the existing tax rules’ which would impact a number of existing structures. The ‘striking feature’ of the section on special measures ‘is the absence of any detail or guidance beyond the most rudimentary outline of the basic idea’. Overall, ‘it is difficult to avoid the conclusion that making material progress on any of these options within a few short months (as is required by the BEPS timetable) will be extremely challenging’.
• Action 14 (to make dispute resolution mechanisms more effective). This Action is focused on addressing obstacles that prevent countries from solving treaty-related disputes under the mutual agreement procedure (MAP) provided by art 25 of the OECD Model Tax Treaty. A taxpayer may make a MAP claim where there has been taxation that is ‘not in accordance with’ the terms of a specific double tax treaty. Cases related to transfer pricing (art 9) permanent establishment (art 5) and business profits (art 7) are most commonly encountered. Deloitte noted that the draft sets out the intention to introduce a ‘three-pronged approach’ to improving MAP resolution of disputes. These include: (1) political commitments to ensure that tax is levied in accordance with treaties and that double taxation is effectively relieved; (2) new measures to improve access to MAP and improved procedures; and (3) a monitoring mechanism to check on proper implementation. James Bullock (Pinsent Masons) described the draft as ‘a disappointing document which points out many of the flaws with the existing process, but offers little in the way of practical solutions.’

Comments on all discussion drafts are invited by 6 February 2015, except for the draft on action 14 for which comments must be submitted by 16 January 2015.