Tax & Accounting Blog

IRS, United Nations Comment on the Latest Developments in Transfer Pricing for Developing Nations

Blog, Global Tax Compliance, ONESOURCE, Transfer Pricing June 19, 2014

Practitioners from the IRS, U.N., and Mexican Tax Administrative Services shared insights on the latest transfer pricing trends, in particular for developing nations, at the first Transfer Pricing Innovation Forum on June 10 in New York City.

Transfer Pricing Updates at the United Nations. Ilka Ritter, Associate Expert in the International Tax Cooperation Unit at the U.N., highlighted two key transfer pricing updates from her unit, which has a mandate to target developing nations.

The first update is the revision of the commentary on Article 9 of the UN Model Convention. Based on the same structure and scope of Article 9 in the OECD Model Convention, the U.N. counterpart concerns profit adjustments on transactions between associated enterprises (such as companies under common control, or parent and subsidiary companies). “[The Article] will still reflect the arm’s length standard,” Ritter said. “And we agree that there is a need for a common international framework.” Ritter also confirmed that the updated Article considers the goals of the G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan as well as the special situation of developing countries, without touching the arm’s-length standard. The comments to Article 9 have been completed, and will be subject to the approval of the Committee of Experts on International Cooperation in Tax Matters in October.

The second revision is an enhancement to the U.N. Practical Manual on Transfer Pricing for Developing Countries. Produced by the U.N. Committee of Experts on International Cooperation in Tax Matters, the manual provides guidance on the policy of inter-group pricing, in accordance with the arm’s-length standard, and technical assistance to developing countries. Ritter said that the revision includes a new section on intra-group services and management fees. “This is an area where developing countries feel they are losing tax revenue.” Other new chapters include one on intangibles, and another on capacity building resources for developing countries.

Comments. The focus on transfer pricing in developing nations is relatively new, according to several practitioners, who generally see this as a positive shift.

“The last 30-40 years of transfer pricing have largely reflected developed countries. There hasn’t been much input from developing countries, so [the new focus] is a good thing,” said Kenneth Wood, senior manager in the IRS Advance Pricing and Mutual Agreement (APMA) program.

“India is an example of a country that has pushed back and said that the margins should be greater, costs should be lower,” said Wood. “Though this is a problem, at a minimum, there is dialogue here, which hopefully can lead to more consensus and make it a bit easier, at least from the IRS’s perspective, to negotiate double taxation cases and enter into APAs.”

Saumyanil Deb, Director of the Transfer Pricing Services Group at Thomson Reuters ONESOURCE, added, “Some developing nations, like India, in the last few years, have become too aggressive in terms of transfer pricing.”

Wood predicted that there will continue to be pushback from developing nations. “I suspect that there will be more pushback over time, as more countries develop their expertise and understanding,” he said. “I don’t think globalization is going to slow down, but will continue to expand.”

He also expects an increase in intercompany trade, and issues regarding intangible property. “The value of intangible property is not going to go down. The more you can leverage IP, the more value it has,” he added.

Lack of Data . Developing nations often lack reliable comparables, and prevent consensus on margins, Wood said, as compared with developed nations where comparables are more widely available. The practitioners agreed that the lack of local data is a major issue when dealing with transfer pricing in developing nations, like Mexico.

Carlos Perez Gomez Serrano, Director of Transfer Pricing Audits at the Mexican Tax Administration Services, said, “For countries like ours, we have a lot of different information, mostly about comparables, so we have to refer to developed countries’ comparables. This is a big issue.” Since Mexico is also a member of the OECD, it refers to OECD and U.N. transfer pricing guidelines. “While the OECD guidelines are more theoretical, the U.N. Manual is more grounded with examples,” Serrano said.

Transfer Pricing Developments–-IRS Perspective. IRS Transfer Pricing Audit Roadmap. IRS released its transfer pricing audit roadmap in February 2014 with the intention of providing guidelines to the IRS to determine risk internally, said Wood, though taxpayers have also benefited from the roadmap.

“The roadmap is just another effort by the IRS to give guidance to its own people. We got rid of the priority of methods, for example,” he said. “So while it will help taxpayers determine what they can expect to happen, [the intention is] not mandated.”

APA Procedures . Recently, more multinational companies are becoming interested in advance pricing agreements (APAs), an improvement from a lull just a couple of years ago, due to a number of factors, according to Wood. “We certainly have been completing more APAs,” said Wood. “I think there will be a continuing need for taxpayers to get APAs.”

He explained that, previously, the APA group was separate from the Competent Authority group in the IRS, and they struggled to drive the number of APAs up. As a result of a merger of the two organizations, the process to complete APAs has become more efficient. “That will drive more taxpayers in, knowing that they can come in, and not face a process that takes four to five years,” he added. He estimated that it now takes about two to three years to complete an APA, though some of this reflects renewals, which are easier to process.

Draft Revenue Procedures. IRS released two draft Revenue Procedures in November 2013, which aim to reflect overall structural changes in the Large Business & International Division of the IRS, according to Wood. “We are trying to tell people that we need more information upfront, in particular with respect to double taxation cases,” Wood said. The IRS can more effectively help taxpayers only if the IRS has more information.”

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