Transfer-pricing in the world of BEPS
The past few years have seen a quantum leap in globalisation, resulting in free movement of capital and labour, shifting of manufacturing bases from high-cost to low-cost locations, gradual removal of trade barriers, technological and telecommunication developments, etc.
These developments have, on one hand, led to increasing sophistication in tax planning by the multinationals enterprises (MNEs) and, on the other hand, there is increasing political concern from tax authorities and governments worldwide over the ability of MNEs to create “stateless” corporate profits that are not subjected to tax by any authority or jurisdiction.
This political concern expressed by G20 countries has led to a major project by the OECD on base erosion and profit shifting (BEPS). Some of the key early developments in the BEPS initiative are push for greater corporate transparency by providing the tax authorities with a high level of visibility into international corporate structures of MNEs and the location of corporate profits. The primary objective of the BEPS project is income and profits should be allocated and taxed in the jurisdictions where there is value creation and not merely where capital and risks lie.
Under the BEPS project, OECD has listed 15 action points which lay down a set of standards that will prevent double non-taxation, equipping the governments with domestic and international instruments to prevent MNEs from paying little or no taxes.
Transfer-pricing (TP) developments in BEPS
Action point 8 of the BEPS plan calls for developing rules to prevent BEPS when MNEs move their intangibles among their group entities, to ensure that profits associated with transfer and use of intangibles are appropriately allocated in accordance with ‘value creation’. Performance of functions, ownership of assets, and assumption of risk were taken into account in determining which controlled entities were entitled to profits.
Action point 9 aims to develop rules to curb BEPS in cases where MNEs inappropriately allocate returns to various group entities by transferring risks, or allocating excess capital. This action will aim to ensure that inappropriate returns will not accrue to a group entity solely because it has contractually assumed risks or has provided capital.
Action point 10 aims to develop rules to prevent BEPS when related parties engage in transactions that rarely occur between third parties. This point identifies global value chains, management fee and headquarter expenses as high-risk transactions which should be re-characterised in given circumstances.
Action point 13 calls for providing the tax administration with adequate information for risk-assessment
