This page is more than 2 years old. Please visit the News page for the latest from DFDL.

Quantera Global: BEPS – OECD presents its first deliverables

The Quantera Global team, one of the world’s leading independent transfer pricing advisory firms and our partner firm for Transfer Pricing, published an article on the first seven of 15 deliverables under the OECD’s Action Plan to deal with base erosion and profit shifting (“BEPS”).

As expected, on 16 September 2014 the OECD released the first seven of 15 deliverables under the OECD’s Action Plan to address base erosion and profit shifting (“BEPS”).

These seven reports relate to:

  • tax challenges of the digital economy (Action 1);
  • hybrid mismatch arrangements (Action 2);
  • harmful tax practices (Action 5);
  • abuse of tax treaties (Action 6);
  • transfer pricing in the key area of intangibles (Action 8);
  • transfer pricing documentation and country-by-country (“CbC”) reporting (Action 13); and
  • feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15).

The deliverables were presented at the recent G20 Finance Ministers meeting in Cairns, Australia. Copies of the reports can be downloaded here (Warning: the documents amount in total to about seven hundred pages of material!).

Action 8 (transfer pricing and intangibles) and Action 13 (transfer pricing documentation and CbC reporting), discussed below, represent the first two instalments of the OECD’s work on transfer pricing. The other two action items on transfer pricing (being Action 9 – Risks and Capital; and Action 10 – Other high risk transactions) will be delivered in 2015 when the OECD has committed to finalise all action items

Action 8: guidance on transfer pricing aspects of intangibles

Action 8 represents amendments to Chapters I, II and VI of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2010) (“the OECD Guidelines”). The changes are intended to address the artificial shifting of profit to no or low tax jurisdictions through “the separation of the location of the return on intangible property and the location where economic activities take place and value is created.” In other words, Action 8 seeks to ensure that profits are allocated in accordance with the activities related to the development, enhancement, maintenance, protection and exploitation of intangibles, and not legal ownership and funding of intangibles.

The modifications to the OECD Guidelines address:

  • the definition of ‘intangibles’ and transactions involving intangibles;
  • determining arm’s length conditions for transactions involving intangibles; and
  • the transfer pricing treatment of:

location savings and other local market features,

assembled workforces, and

MNE group synergies.

The guidance is supplemented with numerous examples illustrating the application of the principles.

The OECD recognises that the 2015 work relating to the transfer pricing treatment of risk and capital will influence the final outcomes of the work on intangibles. For this reason, some sections of the intangibles paper will not be finalised until completion of the guidance relating to wor
k on Actions 9 and 10.

Specifically, the measures which will be considered in the 2015 work include:

  • Providing tax administrations with authority in appropriate circumstances to apply rules based on actual results to price transfers of hard-to-value intangibles;
  • Limiting the return to funding for the development of intangibles to a debt return rather than equity return;
  • Requiring contingent payment terms and/or the application of profit split methods for certain transfers of hard-to-value intangibles; and
  • Requiring application of rules analogous to those applied under Article 7 and the Authorised OECD Approach to certain situations involving excessive capitalisation of low function entities.

Action 13: transfer pricing documentation and CbC reporting

Action 13 is aimed at improving transparency and increasing the quality of information provided to tax administrations for risk assessment purposes. More specifically, MNEs will be required to prepare three documents:

  • a master file containing high-level global information and transfer pricing policies relevant to all multinational group members;
  • a local file identifying relevant related party transactions referrable to the local taxpayer and the transfer pricing analysis of those transactions; and
  • an annual country-by-country report of where revenues, profits, retained earnings, employees, and tangible assets are located and where taxes are paid and accrued.

Quantera Global comments

The OECD has made substantial progress in a very short time frame. However, although agreed to by OECD members and G20 countries, the 2014 deliverables are not yet formally finalised pending the further work in 2015 because of their interactions with the other Actions. At the same time, the OECD has made it clear that countries retain their sovereignty over tax matters and local implementation of the new rules will be a matter for each G20/OECD member. Therefore, there is still a lot of work to be done and the full impact of the BEPS Action Plan on business is unlikely to be felt until after 2015: it is unrealistic to expect that the BEPS issues can be resolved with international consensus and implementation in a two-year period. Nevertheless, the political commitment to deliver on the BEPS agenda remains.

The measures on transfer pricing documentation and CbC reporting will increase the compliance cost and burden on multinationals while at the same time provide tax administrations with more power to assess transfer pricing risks and target audit enquiries.

Multinationals should avail themselves of the opportunity to review, and if necessary adjust, transfer pricing outcomes to reflect functional activity that each entity within the group engages in. Although not yet finalised and codified, multinationals should be aware of the direction that these initiatives are taking and ignore this groundswell of concerted multilateral action at their peril.


Douglas Fone
George Condoleon
Steven Carey
Stean Hainsworth