The Committee of Fiscal Affairs of the Organization of Economic Cooperation and Development (OECD) has released three documents: its proposed updated guidelines on the application of the transactional profit split, draft guidelines on permanent establishments, and an update to Chapter IX of the OECD Guidelines on business restructurings.
These documents, issued in early July, are part of the larger OECD initiative on Base Erosion and Profit Shifting Action Plan (BEPS Action Plan) announced in February 2013 to reduce perceived taxpayer double non-taxation − the presence of corporate income untaxed by any country, an issue that has led to political outcry in Europe, the US and emerging markets.
The profit split method has typically been the most difficult of the prescribed transfer pricing methods to implement and support. Importantly, the profit split draft establishes a narrow set of criteria for its selection as the “best method” under the OECD Guidelines. The draft asserts that the profit split method should not be used simply because there is a lack of good outside evidence to implement alternative methods, such as the comparable uncontrolled transaction or the transactional net margin method. Rather, the draft advises that appropriate economic adjustments to the available data under those alternative methods is preferred.
The profit split draft will do little to address the concerns of tax authorities and non-governmental bodies on the overreliance on one-sided methods. In addition, while the profit split draft does a fine job of describing the challenges of using the profit split method, it is less effective in prescribing practical guidance on its implementation. Overall, the profit split draft envisions a rarely used method, with implementation heavily reliant on facts and circumstances specific to the transaction. However, the draft requests comments on various new points, so it might properly be viewed as a current work-in-progress.
The discussion draft on permanent establishments (PE) is a follow-up from BEPS Action 7, especially as it interrelates with other BEPS initiatives around transfer pricing, intangibles, and risks. This draft focuses on dependent agent PE such as those created through commissionaire structures as well as warehouses as a fixed place of business.
The objective of the modifications to the OECD Guidelines Chapter IX on business restructurings is "not to revisit the guidance on business restructurings but to focus attention on changes necessary to address inconsistencies, real or perceived, with the revised chapters.” While most of the changes are modest, there are some potentially significant issues around the control of intangibles and risks, the transfer of functions, and the important question of when a transaction is “commercially rational.”
In the near future, we will be issuing additional comments on the profit split, permanent establishment, and business restructurings drafts. In the meantime, please contact Paul Flignor with any questions about these developments and their implications for your business.
You may also enjoy our report on additional guidance from the OECD on the attribution of profits to permanent establishments.