Transfer Pricing after BEPS
Four years ago, the OECD launched the final reports on its comprehensive BEPS project which also tried to address some key issues for transfer pricing. New transfer pricing guidelines put more emphasis on the economic contribution of each group entity. This is a reasonable approach to answer the challenges of the digital economy. At the same time, the interpretation and measurement of “economic contribution” could create more challenges than the earlier approaches. Given the opposing interests of tax administrations in transfer pricing issues, the results of BEPS Action 14 (Mutual Agreement Procedure) are rather modest. The current outcomes include only “best practices” recommendations, but no binding exact guidelines for multilateral advance pricing agreements or dispute resolution mechanisms.
In MY VIEW, the different progress in transfer pricing and its institutional setting after the OECD BEPS project might increase the risk of possible double taxation or long-lasting dispute resolution procedures. The careful “ex ante” structuring and analysis of the value chain for single group entities is more important than ever before in the area of transfer pricing.
The high relevance of transfer pricing in the whole OECD BEPS project can be seen in the fact that four of the fourteen action items handled transfer pricing issues. Actions 8 to 10 sought to address the steadily increasing relevance of intangibles in the economy.
Any transfer pricing agreement requires a function and risk analysis as a first step. In the relaunched OECD transfer pricing guidelines from 2017, the relevance and general approach has been changed drastically. The contractual terms only play a minor role in the determination of the function and risk profile of an entity. The terms have always to be substantiated by the actual decision-making in the entity’s business.
Closely related to that point is the new consideration of intangibles. First of all, the definition of an intangible has been expanded as everything which is not an asset could be seen as an intangible. Second and much more important, the OECD proposed a completely new approach to measure the economic contribution of an entity to the intangibles of the group. In the old system, it was possible to attribute all revenues of an intangible to its legal owner. The new approach requires a detailed and separate function and risk analysis for intangibles. Therefore, a five-step procedure has to be performed to analyze the economic contribution of an entity. This is the so-called DEMPE concept (Development, Enhancement, Maintenance, Protection, Exploitation).
The new emphasis on the economic contribution and intangibles also required a review of the appropriateness of single transfer pricing methods. In 2018, the OECD transfer pricing guidelines chapter for the application of the transactional profit split method has been completely revised. The transactional profit split method is now seen as an appropriate method if unique intangibles are part of a transaction.
First experiences with clients show that the new concepts are especially relevant for companies with digitalized business models. The application of the DEMPE concept really helps to identify the economic contribution of an entity. At the same time, the in‑depth analysis requires a higher effort and it is sometimes difficult to apply the abstract concepts to the client’s actual situation. Moreover, it requires an intensified collaboration between single Moore Global member firms to analyze the economic contribution and to avoid inconsistencies towards the different tax administrations.
The abstract nature and the rare guidelines on the DEMPE concept increase the necessity for a multilateral advance pricing agreement. It has been also acknowledged by the OECD that the changes for transfer pricing due to BEPS require a significant review and amendment of the agreement procedures. However, the results of the corresponding BEPS Action 14 are rather unambitious. The main results are a peer-review of the country-specific rules and the elaboration of “best practices”. Moreover, clients have to adapt and change their business in an even faster way. The OECD recommendation that cases should be resolved within a time frame of 24 months is therefore rather unsatisfactory.
As the peer review process is still ongoing, the conditions for multilateral agreements in general might improve in the near future. In the meantime, clients (and we as their advisors) have only the choice between applying new concepts and facing a higher risk of a dispute or filing for a long-lasting multilateral agreement procedure.
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