On June 6, 2017, the OECD completed its two-day 2017 International Tax Conference in Washington, D.C., in partnership with the U.S. Council for International Business (USCIB). As with day 1 of the event, the OECD BEPS project was the focal point of the panels on day 2, which included discussions by government officials, OECD members, and multinational executives.
Panel 4 – Transfer Pricing (Part I)
This panel covered current OECD work on guidance regarding the use of the profit split method (PSM) and on transfers of hard-to-value intangibles (HTVI). The foregoing guidance was mandated by the BEPS Action 8-10 final report.
Jefferson VanderWolk, Head, Tax Treaty, Transfer Pricing & Financial Transactions Division, OECD Centre for Tax Policy and Administration, moderated the panel and said that value creation in the BEPS project involves evaluation of substance, and new online business models structured without intangibles and few employees, among other measures. He also said that tax authorities are allowed to look beyond contract terms and instead should focus on conduct of related parties, under Chapter 1 of the OECD Transfer Pricing Guidelines.
Mike McDonald, Financial Economist, U.S. Treasury, said that BEPS Action 10 invites clarification on transfer pricing methods, particularly the PSM, in the context of global value chains. The OECD Working Party 6 is aiming to release revised public discussion drafts on the PSM by mid-2017.
McDonald said that PSM is a special measure that allows consideration of ex post transfer pricing results by tax authorities to compare with ex ante projections. McDonald suggested that taxpayers examine examples in Annexes II and III to Chapter II of the OECD Transfer Pricing Guidelines for illustrations on application of the PSM. The PSM should not be the default method, but instead transfer prices should be based on the best method. OECD guidance on the PSM suggests following the U.S. approach of looking at the “real deal” entered into by the related parties. As a result, taxpayers should make their contracts clear, and ensure that they follow their contract, to ensure little or no change by tax authorities during their ex post review of ex ante projections of transfer pricing risk.
McDonald added that the OECD’s HTVI guidance covers transfers where no reliable comparables exist, and value/future income is highly uncertain. HTVI involves transactions where taxpayer knows more than the government on the covered transactions.
Bill Sample, VP – Tax, Microsoft, said that profit split indicators include unique and valuable intangibles (DEMPE functions), integration, lack of comparables, value chain analysis, and synergy. The PSM should be applied in the context of the arm’s-length principle. Future possession of intangibles should include analysis of DEMPE functions. Profit split factors are ex ante measures that are measurable, verifiable, and related to profits to be split.
Philippe Penelle, Managing Principal, Deloitte, said that most MNEs do not have a clear vertical hierarchy, but instead are flat matrix organizations that use stage-gate and committee decision making, with various reporting lines. The Action 10 guidance on the PSM and HTVI is vague as it reflects consensus among countries, so can be interpreted differently by each country. The order of reviewing to determine who has decisional control is important (e.g., look at experience vs. title of employees). Penelle suggested that the OECD should include more examples in the PSM and HTVI discussion drafts to help taxpayers take defensive positions during tax audits.
Panel 5 – Dealing Effectively with Disputes: Before they Start (Part 1)
This panel discussed approaches designed to avoid tax disputes and having to resort to mutual agreement procedure (MAP), including comparative compliance programs, advance pricing agreements (APAs), and joint audits.
Achim Pross, Head, Int’l Cooperation and Tax Administration Division, OECD Centre for Tax Policy and Administration, moderated the panel, and also brought up the OECD International Compliance Assurance Program (ICAP) being developed that will allow tax authorities to jointly perform risk assessments as a new dispute prevention tool, mainly to process country-by-country (CbC) reporting information under Action 13. The Key drivers of the OECD ICAP program are BEPS Actions 13 and 14, MNE compliance frameworks, international collaboration forums, and benefits to low risk MNEs. The ICAP program is also an OECD attempt to clear out MAP inventory for possible tax authority focus on other tax issues.
Fabrizia Lapecorrella, Director General of Finance, Ministry of Economy and Finance, Italy, discussed current work by Italy to improve its tax system, which is often perceived as highly uncertain due to frequent changes to legislation, several institutions involved in tax controls, and lengthy decisions by courts. Recent Italian initiatives to address the foregoing include increased use of APAs, cooperative compliance programs, joint audits, new transfer pricing rules (effective April 2017), and the OECD ICAP pilot program. Lapecorrella said that Italy performed a joint audit pilot program with the German state of Bavaria for tax years 2013 and 2015, based on the EU Directive on Administrative Cooperation and OECD Convention on Mutual Administrative Assistance in Tax Matters, and had good results. Italy’s new transfer pricing rules include codification of the arm’s-length principle and allowance of corresponding transfer pricing adjustments without need of MAP.
Tim McDonald, VP – Finance and Accounting, Global Taxes, Procter & Gamble, said that tax authorities are coordinating their work now in a way that was not conceivable 20 years ago. Transparency is the minimum down payment to attempt to avoid contentious tax controversy. McDonald suggested that MNEs start their transparency work by describing their business models, value drivers, and competitive landscape in master file. MNEs should assume that the cooperative compliance process will take an investment of financial and managerial personnel as they are generally time consuming. MNE should also consider enrolling in the new ICAP voluntary pilot program among the OECD FTA (Forum on Tax Administration) members.
McDonald added that APAs are not for everyone, but they are the gold standard when they are practical to obtain and the taxpayer is comfortable with their facts. APAs are most beneficial for large taxpayers that are audited every year, and in multiple countries. A successful APA strategy can drastically improve quality of MNE earnings by reducing the need for tax reserves, which are otherwise needed due to the arm’s-length range concept and the uncertainty of the PE threshold.
Sharon Porter, Director, Treaty & Transfer Pricing Operations (LB&I), U.S. IRS, discussed recent U.S. work on dispute resolution. The current U.S. Advance Pricing and Mutual Agreement (APMA) inventory is predominantly based on foreign-initiated adjustments. For 2016, most executed or pending bilateral U.S. APAs involved Japan, Canada, or India. The IRS expecting a drop in unilateral APAs due to U.S. participation in exchange of tax rulings under the BEPS Action 5 framework.
Porter also discussed the OECD ICAP pilot program for CbC reporting. The first ICAP meetings will take place near the end of June 2017, with participation by Italy, Spain, Australia, Germany, Canada, the Netherlands, and the U.K. Procedures for ICAP pilot are being finalized, and potential candidate taxpayers will be contacted about voluntary participation. Candidates will consist of one MNE from each participating jurisdiction, to be confirmed by July 2017, with the kick-off session likely to start in October 2017. Following the OECD ICAP pilot program, the OECD will generate a report assessing the feasibility of a broader roll-out, participating in which would be up to each individual tax administration.
Panel 6 – Dealing Effectively with Disputes: When They Happen (Part 2)
This panel covered tax disputes after they begin.
Achim Pross moderated this panel as well, and provided more information on the OECD ICAP pilot for CbC reporting. The ICAP pilot is in a coordinated risk assessment stage, which may be extended to more countries if the pilot stage is successful. Taxpayer participation in ICAP is voluntary, but if accepted, taxpayers will have to provide their CbC report sooner than they would otherwise under filing deadlines. The ICAP pilot stage will last up to nine months, before the results will be shared with more tax authorities.
Fabrizia Lapecorella said that Italy’s political priority for 2017 is to address inefficiency of its MAP process. There was a very large number of unresolved MAP cases at end of 2016 in Italy.
Deborah Palacheck, Director, Treaty Administration (LB&I), U.S. IRS, said that the IRS compiled information for the BEPS Action 14 peer review this past winter, and received useful feedback from peers on its MAP practices. The IRS is encouraging electronic communications with treaty partners, especially based on peer recommendations to do so.
The BEPS Global Currents team did not attend the remaining Day 2 panel events (i.e., Inclusive Framework on BEPS & Developing Countries and Transfer Pricing (Part 2)