The new edition of the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations (Guidelines) was published on 20 January 2022. Notable inclusions in this edition are as follows:
- The Revised Guidance on the Application of the Transactional Profit Split Model has been incorporated into the Guidelines at Chapter 2, Part III, Section C.
- The section of the 2015 BEPS Actions 8-10 Report which provides guidance for tax administration on the application of the approach to Hard-to-Value-Intangibles (BEPS Action 8) is incorporated at Chapter 6, Section D.4 of the Guidelines.
- Sections A-E of the Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10 are incorporated into the Guidelines at Chapter X, and Section F, on risk-free and risk-adjusted rates of return is incorporated at Chapter I, Section D.1.2.1 (following paragraph 1.106 up to 1.126).
As anticipated, the formal inclusion of these pre-approved changes in this latest 2022 edition of the Guidelines will increase the additional compliance burden on taxpayers.
It should be noted that, in some jurisdictions, local legislation is explicit as to which years the different versions of Guidelines are effective for interpretation purposes, e.g., Australia.
However, in other jurisdictions, the updated Guidelines are treated by tax authorities more as confirmations of interpretation for earlier years, such as Germany and Italy. However, often there are in fact legal arguments that, until references are updated in legislation whether by government order or automatic inclusion, there should be no ability to use that interpretation for audits for earlier years.
Hence, in the event of audits on the topics where new materials have been incorporated, consideration should be given as to whether these new Guidelines should be applied.
In more detail
The key highlights of the latest revisions are summarized below:
The Revised Guidance on the Application of the Transactional Profit Split Model
- The guidance provides specific hallmarks to consider for selecting the profit split model.
- There remains a risk of unwanted proliferation of the profit split model and much is left open for interpretation; the identification and measurement of appropriate profit split factors is likely to be the most contentious point and create audit risk for those deciding to adopt the model.
- However, there is now greater clarification on when the profit split model is unlikely to be the most appropriate transfer pricing method to select.
This guidance can be seen as a source of increased assurance for taxpayers as it suggests that tax authorities should not default to the application of a profit split method even if comparables do not exist.
The Guidance for Tax Administration on the Application of the Approach to Hard-to-Value Intangibles
- Taxpayers now have more clearly defined rules concerning when tax authorities can make adjustments when outcomes differ from expectations.
- To avoid ex-post adjustments, taxpayers should consider preparing detailed contemporaneous documentation to support the transfer price of their intangible transactions and be able to identify all likely risks related to the transferred intangibles.
- It may also be prudent to implement mechanisms that independent parties have historically used to account for uncertainty in valuing intangibles, such as contractual provisions to account for the effects of reasonably foreseeable developments.
The New Guidance on Financial Transactions
- The guidance summarizes key issues surrounding pricing of intercompany financial transactions and provides helpful commentary around the use of credit ratings, the availability of market data and the importance of data available at the time of the transaction, the uniqueness of cash pools to multinational groups and proposed methods applicable to relevant transactions.
- The rules are likely to shape the international environment for domestic and bilateral disputes in the context of financial transactions so it is important that companies assess the impact of the paper against their existing intra-group financial transaction pricing policies.