BY: GREGORY T. BRYANT & KYLE H. WINGFIELD
On July 30, 2013, the Organisation for Economic Cooperation and Development (the “OECD”) issued its White Paper on Transfer Pricing Documentation (the “White Paper”).[1] The purpose of the White Paper is to initiate a global conversation on how to simplify transfer pricing documentation rules and to provide tax authorities with more focused and useful information. It really is framing the future battleground.
The White Paper is a further expression of the growing call to (1) improve transparency, (2) standardize transfer pricing approaches and (3) focus on certain structures that appear to be abusive. The White Paper was issued in conjunction with the OECD’s Action Plan on Base Erosion and Profit Sharing published on July 19, 2013 (the “BEPs Action Plan”)[2] and in response to communication from the G8 Summit held on June 17-18, 2013 in Ireland calling for the OECD to develop a common template for country-by-country transfer pricing reporting to enhance transparency and improve risk assessment regarding multinational enterprises (“MNEs”).[3] Pursuant to the BEPs Action Plan, the OECD will
[D]evelop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries, according to a common template.[4]
The White Paper surveys the current transfer pricing documentation requirements; considers the objectives of transfer pricing documentation; and makes suggestions on how to modify, streamline and simplify the transfer pricing documentation rules. The OECD invites interested parties to provide written comments on the White Paper by October 1, 2013. The OECD plans to hold public consultation on the White Paper on November 12-13, 2013 in Paris, France.
This Alert summarizes the key observations and suggestions provided in the White Paper.
KEY OBSERVATIONS & SUGGESTIONS
REQUEST FOR PUBLIC COMMENT
As noted, interested parties are invited to send comments on the White Paper by October 1, 2013. Comments also are welcome on the most appropriate means of implementing the transfer pricing documentation directives of the BEPS Action Plan. Comments should be sent to TransferPricing@oecd.org. A public consultation on the White Paper and other transfer pricing matters is expected to be held at the OECD Conference Centre in Paris, France on November 12-13, 2013.
CONCLUSION
Over the last 20 years, transfer pricing documentation requirements have rapidly spread around the world. This trend has coincided with greater transparency in all financial and business matters. In the world of e-mail and e-commerce, there is tremendous transparency. The proliferation of diverse local transfer pricing documentation requirements, combined with a dramatic increase in the volume and complexity of international intra-group trade, makes transfer pricing documentation one of the top tax compliance priorities on the agendas of both tax authorities and businesses.
The importance of aligning the tax structure to your business operations becomes increasingly important. Transfer pricing will largely stand or fall on the business substance supporting it. The documentation of transfer pricing will only be relevant and useful if it documents a strong alignment of business to structure. Getting transfer pricing built into your daily processes and systems will greatly reduce your risk under exam.
[1] OECD, White Paper on Transfer Pricing Documentation (July 30, 2013), http://www.oecd.org/ctp/transfer-pricing/white-paper-transfer-pricing-documentation.pdf.
[2] OECD, Action Plan on Base Erosion and Profit Sharing (July 19, 2013), http://www.oecd.org/ctp/BEPSActionPlan.pdf
[3] G8 Communique, Action 3 (2013), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207771/Lough_Erne_2013_G8_Leaders_Communique.pdf
[4] OECD, Action Plan on Base Erosion and Profit Sharing (July 19, 2013), Action 13, http://www.oecd.org/ctp/BEPSActionPlan.pdf