The OECD has released comments submitted by interested parties on three papers:

  1. Discussion Draft on Revisions to Chapter I of the Transfer Pricing Guidelines (including, Risk, Recharacterisation, and Special Measures).
  2. Discussion Draft on the use of Profit Splits in the Context of Global Value Chains.
  3. Discussion Draft on the Transfer Pricing Aspects of Cross- border Commodity Transactions.

The papers have been released to help tackle BEPS Actions 8, 9 and 10 which assure that transfer pricing outcomes are in line with value creation. We have provided a summary of the general comments submitted by interested parties on each of the three papers.


The general consensus across the set of comments submitted is one of support but with significant reservations in some areas. The work carried out by the OECD in relation to BEPS Actions 8, 9 and 10 is to assure that transfer pricing outcomes are in line with value creation. Part I of this Discussion Draft emphasises the importance of delineating the actual transactions accurately. It details guidance on the analysis  of risk for a functional analysis. While the comparability factors remain the same as in the current guidelines, greater emphasis is put on the analysis of risk. Part 1 also discusses the subject of non-recognition or recharacterisation. To test for non-recognition the Discussion Draft proposes the use of a commercial rationality test. This requires consideration of whether the actual arrangements differ from those which would have been adopted by independent parties behaving in a commercially rational manner. Part II of the document sets out options for special measures to deal with intangible assets, risk and overcapitalisation, which it suggests are often beyond the arm’s length principle.

Interested parties express their concerns that the proposal  will lead to an increase in uncertainty. The idea that factual substance is preferred over contractual arrangements when there are differences between the two, can lead to uncertainty for both taxpayers and tax authorities. Furthermore, it is likely that an extremely detailed functional analysis will be highly burdensome for the taxpayer and tax administration alike.

Understandably recharacterisation proves to be an area of concern for interested parties. There are concerns that the commercial rationality test used to test non-recognition may be used by tax administrators to seek unwarranted recharacterisation leading to an increase in tax disputes. To counter this, it has been suggested that the OECD should develop guidance that provides taxpayers with the information that they need to establish business arrangements that will  be respected by tax authorities. It has also been suggested to the OECD that there needs to be safeguards around how recharacterisation should be applied. Furthermore, it has been suggested to the OECD that they should take into account the fact that many domestic tax regimes have legislation in place that already, can involve the recharacterisation of transactions where the economic attributes of a transaction differ from its form.

Some respondents stated that Chapter VI and Chapter IX of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 (“the guidelines) already provide a reliable framework in the context of risk and recharacterisation. In particular, it has been suggested that the concept of “options realistically available” stated in Chapter IX of the guidelines along with an appropriate functional and comparability analysis may be more appropriate in the subject of risk and recharacterisation.

The Discussion Draft asks for responses to the subject of risk in relation to the financial services sector. The general consensus is that the Report on Attribution of Profits to Permanent Establishments should provide good guidance in relation to the subject of risk. Interested parties have pointed out that  the financial services sector is highly regulated. Allocation of capital in a financial service enterprise and its subsequent risk is extremely important to regulators and the OECD should take regulatory factors into account when providing guidance in relation to financial services. Furthermore, it has been suggested that the financial services sector should be carved out from the current discussion on risk, recharacterisation and special measures, and should be dealt with separately.

Interested parties have pointed out that for special measures, it should always be best practice to test whether the arm’s length principle holds. If the arm’s length principle does hold for special measures, the transfer price should be based on the arm’s length principle. Article 9 of the Model Tax Treaty will need to be amended to acknowledge cases where special measures are not compatible to the arm’s length principle.

Furthermore, it has been suggested that dispute resolution and relief from double taxation should be applied to special measures in a similar manner when compared to other treaty matters. A common view point is that the topic of special measures is an important area that should be carefully considered by the OECD. Interested parties have suggested that special measures should be dealt with after the BEPS timetable and further input from industry should be used when designing guidance in relation to special measures.


The Discussion Draft on the Use of Profit Splits seeks insight on experiences and best practices in applying the transactional profit split method. This Discussion Draft suggests that the profit split method may be useful in the context of global value chains when the tested transaction has significant levels of integration which lead to the creation of synergies and/or sharing of sufficient levels of risk. In addition, the profit split method may be appropriate when a one sided method cannot be reliably applied because of the lack of reliable comparables. The Discussion Draft also suggests that a thorough functional analysis should be conducted by analysing the functions, assets and risks of each of the parties in the controlled transaction before selecting an appropriate transfer pricing method. The purpose of the Discussion Draft is to gain an insight on how a profit split is applied in practice with the aim of developing guidance on BEPS Action 10 which will provide rules to prevent profit shifting by engaging in transactions which would not, or would only very rarely occur between third parties.

In general, interested parties believe that the Discussion Draft may lead to a bias towards the profit split method. Tax administrators may take the position that the profit split should be applied when a functional analysis uses words such as highly integrated, sharing of risks and global value chains, however in reality there may be a more reliable transfer pricing method that can be used. There is a strong belief amongst interested parties that emphasis on the profit split method will lead to the risk of a shift towards formulary apportionment. Interested parties are concerned that an increase in the use of profit splits may lead to the increase in audits and disputes resulting in double-tax issues due to significant differences in multilateral profit splits. Solving multilateral double tax disputes can be extremely challenging and it is essential that effective multilateral mutual agreement procedures (MAPs) and APAs are available if the use of profit split is to increase.

Interested parties have pointed out several difficulties of the profit split method. A common comment is that applying the profit split is time consuming due to the data required when calculating the profit split. Furthermore, there are difficulties in finding appropriate data that can be easily used to compare across multiple entities and data that represents an accurate measure of value between different entities. In practice, allocation keys such as incremental sales, headcounts, time spent by a certain group of employees and compensation do have readily accessible data and may not represent an accurate measure of value. Using sophisticated allocation keys such as cost based allocation keys and asset based allocation keys can be expensive and time consuming due to the fact that these keys would require updating and maintaining on a frequent basis.


The purpose of the Discussion Draft on Cross-Border

Transactions is to ensure that pricing reflects value creation to protect the tax bases of commodity dependent countries. This Discussion Draft emphasises that where a comparable quoted price is available, the quoted price may provide a reliable CUP. If there are material differences between the terms and conditions of the controlled transaction and the uncontrolled transaction, a suitable adjustment should be made to improve the reliability of the analysis. The Discussion Draft proposes a ‘deemed pricing date’ for commodity transactions, in the absence of reliable evidence of the pricing date actually agreed between the associated enterprises. This ‘pricing date’ refers to the specific date or time period selected by the parties to determine the price for the commodity transactions. The price is the quoted price, incorporating any comparability adjustments, on the shipment date as evidenced by the bill of lading or equivalent documents for the pricing date.

Interested parties have raised concerns stating that the CUP method may not always be appropriate for all types of commodity transactions. For example, in the intermediary stage of a product life cycle, in some cases the resale price method may be more reliable whereas in other cases the transactional profit split method may be more appropriate. Furthermore, there may be cases where spot prices may not be reliable in providing an accurate value of the transaction. For example, using the spot price from an index to value a long term transaction would not provide an accurate value for the tested transaction.

In addition, commodity prices can be volatile and it is common for commodity traders to use hedging techniques as a form of risk management. Using the spot price to price a commodity transaction that uses hedging techniques may fail to recognise an accurate and reliable value for the transaction. It has been acknowledged by several interested parties that internal CUPs can be a reliable and accurate method when pricing commodity transactions. Many interested parties fear putting too much emphasis on the CUP method may lead tax authorities to believe that only the CUP method should be appropriate for commodity transactions when this is not the case.

Interested parties have suggested that the deemed pricing date should not be used as a shortcut or safe harbour by taxpayers or tax authorities. Instead a thorough transfer pricing analysis should be carried out to find an accurate value of the transaction and the deemed pricing method should only be allowed during exceptional circumstances. It has also been suggested that there should be safeguards in place to avoid the misuse of the deemed pricing date.