Given the evolving tax landscape and the OECD’s influence on international tax policy, transfer pricing remains high on the agenda of tax administrations and taxpayers. It is critical for multinationals to continue to have broad oversight of the latest updates.
Since its first iteration in 1979, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”) have been shaping the international consensus on the treatment of cross-border transactions between associated enterprises. The latest version released on 20 January 2022 consolidates the previous publications and provides the latest reference guidelines for companies to consider going forwards.
What changes were made to the OECD Guidelines?
The latest guidance includes reference to materials released by the OECD since 2017, namely:
- the Revised Guidance on the Transactional Profit Split Method, approved by the OECD/G20 Inclusive Framework on BEPS on 4 June 2018;
- the Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles, approved by the OECD/G20 Inclusive Framework on BEPS on 4 June 2018; and
- the Transfer Pricing Guidance on Financial Transactions, adopted by the OECD/G20 Inclusive Framework on BEPS on 20 January 2020.
The Transactional Profit Split Method
The guidance on the transactional profit split method recognized that multinationals often have multiple contributors to value, leading to difficulties with unwinding the allocation of increasingly complex value chains. It also acknowledged that tax authorities increasingly take a holistic view rather than a one-sided tested party approach, particularly in the case of unique and valuable intangibles, situations involving highly integrated business activities, and with shared functions, assets, and or risks.
The adjustments made to Section C of Chapter II (as well as Annexes II and III to Chapter II) focus on delineating the transactions, providing examples of potential challenges to the profit split (i.e. segregation of financial data and dealing with different accounting standards) as well as offering further practical guidance on its utilization. In particular, the guidance provides examples of when specific profit split allocation keys should be used, based on the delineation of the transaction and objective data, and allows consideration of comparable analyses including valuations and qualitative factors.
The hard-to-value-intangibles approach was integrated into Annex II to Chapter VI of the OECD Guidelines to provide a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the hard-to-value-intangibles approach.
The hard-to-value-intangibles approach acknowledges the challenges both with preparing projections used for valuations, as well as potential information asymmetry and timing issues between taxpayer and tax authority.
It ensures that tax administrations can consider ex-post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements, whilst permitting taxpayers to rebut certain presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time the controlled transaction took place.
The Transfer Pricing Aspects of Financial Transactions was included as a new Chapter X to the OECD Guidelines. It requires accurate delineation of transactions as outlined in Chapter I, particularly determining the characterization of a balance as debt or equity, as well as the corresponding commercial or financial relations.
Guidance is provided on determining the arm’s length conditions for treasury activities including intra-group loans, cash pooling and hedging as well as financial guarantees and the dealings of captive insurance companies.
This is provided in the context that as part of a multinational group, subsidiaries may receive support from the group to meet its financial obligations (especially guarantees and loans) in the event of financial difficulties solely by virtue of group affiliation. This implicit support may also impact a subsidiary’s credit rating.
Similarly to the 2017 Guidelines in case of non-financial transactions, it also acknowledges that regulatory constraints play an important role in the determination of the terms of the contract of financial transactions, specifically highlighting the Basel requirements as an example of regulatory constraints that could affect the conduct of the parties and the terms of the financial transactions.
How should companies react to this?
In principle, these adjustments simply align the current OECD Guidelines with previous publications. However, to the extent that they have not already done so, local tax authorities may use this as a framework to revisit local legislation and guidelines, so companies should remain vigilant regarding any changes in domestic guidance. The fragmented approach, for instance, to the release on financial transactions has highlighted the importance of closely following local changes in regulation.
Tax authorities may also aim to use the OECD Guidelines to strengthen their positions, i.e. in cases of audit, on scenarios involving entities with strongly integrated value chains, unique IP or financial transactions.
In addition, companies should also refer to the updated OECD Guidelines for transfer pricing compliance and planning documentation going forward, also in Switzerland, which adopts the OECD approach in its transfer pricing. This is of particular importance given the anticipated upcoming transparency requirements (i. e. public Country-by-Country Reporting), which could bring increased public and tax authority scrutiny.
How can KPMG help?
KPMG can provide specialist support on the above-mentioned areas as well as real time feedback on domestic changes as part of these adjustments.
In particular, we can provide a transfer pricing health-check to ensure compliance with the latest OECD TP Guidelines or highlight areas of risk. This can help companies to plan ahead to manage impacts based on increasing reporting requirements and an evolving tax landscape.