A group of multinational enterprises (MNEs) in the United States and abroad has asked the U.S. Treasury to “significantly change” certain transfer pricing guidance arising from the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit shifting (BEPS) project.
The group says it believes that the proposals should be debated by participating countries as “non-arm’s length special measures” that should only be applied prospectively, rather than “slipped into” the international tax system “under the guise that they are consistent with the long-standing arm’s length standard.”
The MNEs are members of the Transfer Pricing Discussion Group and represent a variety of industries. In a recent letter to the U.S. Treasury, the group stated that the BEPS pricing proposals represent “a substantial change in OECD’s and member countries’ stated positions on the meaning of the arm’s length standard.” The group noted that many other commentators expressed similar views.
In addition, the group said that, in certain cases, the proposals are inconsistent with the allocation of income and deductions section of the U.S. Internal Revenue Code as interpreted by U.S. courts for many years. As such, the group expressed concerns that other countries might interpret Washington’s failure to express its reservations to such proposals as an indirect endorsement, raising the incidence of double taxation of income for U.S. MNEs and their foreign subsidiaries, among others.
Proposals of greatest concern
The discussion group has expressed concerns that the proposals “will create tax and trade chaos” for U.S.-based multinationals and their affiliates, among others. The chaos is also due to country-by-country (CbC) reporting and the lack of support among most countries for adopting mandatory binding arbitration. Here are the proposals that concern the multinational companies:
- Subjective bases for imposing and using profit splits. The group says the BEPS project introduces undefined, or loosely defined, subjective bases that will frequently allow tax administrations to argue in audits that profit splits should be used to determine the allocation of income from transactions between related taxpayers rather than transfer pricing using marketplace benchmarks.
- Factors for determining which affiliate is entitled to returns from intangible property rights. TheMNEs say they thinkthe transfer pricing proposals overlook or diminish the commercial reality that risks and capital have significant claim on returns from intellectual property for transfer pricing purposes.
- Proposals that may encourage tax administrations to ignore or overrule a taxpayer’s actual transactions. The group maintains that the transfer pricing proposals may encourage tax administrations to speculate on what third parties might have done or conform a taxpayer’s transactions to their “economic substance.”
The Transfer Pricing Discussion Group recommends that the U.S. Treasury reserve judgment on these aspects of the proposals destined for the OECD guidelines and other BEPS transfer pricing documents “if it cannot convince the participating countries to either change them significantly so that they will be genuinely consistent with the arm’s length standard or to debate their adoption by legislation or treaties as non-arm’s length special measures.”