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BEPS: OECD releases profit splits discussion draft

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The OECD has released its discussion draft on the use of profit splits in the context of global value chains as part of the work on BEPS Action 10. Action 10 identifies that work needs to be undertaken to develop ‘rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to ...  clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains’

The discussion draft uses a number of scenarios in which it may be more difficult to apply one-sided transfer pricing methods to determine outcomes that are in line with value creation, and poses questions which focus on the circumstances in which the application of a transactional profit split method may be appropriate, as well as the ways in which the factors used to split the profits can align profits and value creation.

Interested parties are invited to submit written comments by 6 February 2015. A public consultation on the discussion draft and other topics will be held on 19–20 March 2015 at the OECD Conference Centre in Paris.

The publication of the draft follows an OECD webcast on Monday which the reported progress on the BEPS project (see George Bull, senior tax partner at Baker Tilly, noted that two points attracted attention. ‘First “commissionaire arrangements” – such as those said to be used by Apple in certain jurisdictions – will be challenged in a way which bases tax liabilities on the actual transactions and activities undertaken in a country, and not the strict legal position as disclosed by documents intended to achieve tax planning benefits … Expect more news on this in January 2015.’

‘Second, the UK’s proposed new diverted profits tax was discussed.’ The OECD was still looking at the proposal but ‘made it clear that they wish to see the diversion of profits tackled through multilateral action’. Bull added: ‘Cutting through the niceties of political language, that’s a bit of a slap on the wrist for the UK chancellor and his bid to go it alone with the diverted profits tax.’