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The new transfer pricing landscape

A practical guide to the BEPS changes

The Organization for Economic Cooperation and Development (OECD) on 5 October 2015, released the final reports under the Base Erosion & Profit Shifting (BEPS) project. The new guidance has been hailed as a game changer expected to alter the transfer pricing outcomes in many situations and require multinational enterprises to undertake additional analysis and documentation. But how will the new guidance impact your company?

Navigating a new transfer pricing environment

This new guidance has been hailed as a game changer expected to alter the transfer pricing outcomes in many situations and to require multinational enterprises to undertake additional analysis and documentation.

But how will the new guidance impact your company?

In this book, the transfer pricing professionals of Deloitte have sought to provide practical considerations in answer to that question. The nine articles in this collection each address a specific transfer pricing issue, providing an overview of the changes wrought by the new guidance and practical recommendations for taxpayers who will find themselves navigating the new transfer pricing environment. The articles are presented in the same order as the topics they address appear in the final OECD reports.

Read an excerpt from each of the articles, and download the complete collection using the link to the left.

The changes to Chapter I of the OECD Transfer Pricing Guideline provide a revised interpretation of the arm’s length principle predicated on an expanded view and analysis of the economic substance of a controlled transaction. The expanded analysis required to determine whether a controlled transaction has economic substance involves a significantly more granular functional and risk analysis than previously, referred to as "accurately delineating the actual transaction."

Under the new guidance, a contractual allocation of risk (and associated expected return) will be respected if and only if each party contractually allocated a risk is considered, through the accurate delineation analysis, to control their allocated risk and to have the financial capacity to bear the risk. The analysis of risks and of the functional control of risks thus becomes a pivotal element of the expanded functional analysis required under the new guidance.

From a practical standpoint, taxpayers will have to separately identify the various risks involved in their controlled transactions and analyze and document, for each of them, the party actually making the decisions to take on, lay off, and mitigate the risks. Financing risks are specifically called out in the new guidance as being separate and distinct from operational risks. The mere fact that a legal entity exercises control of a funding risk does not entitle that entity to the returns associated with operational risks, unless it exercises control of those operational risks as well.

To read the rest of the article, download the full collection at the top of the page.

Location-specific advantages or LSAs are those location-specific market features and/or factors of production that enable a business to achieve an improved financial outcome from the provision of the same product or service relative to alternative locations. The concept may include access to skilled labor, incentives, market premium, access to growing markets, superior infrastructure, and cost savings.

The new guidelines focus on two types of LSAs:

  • Location savings: These arise from cost savings due to differences in the cost of operations (arising from lower labor costs, real estate costs, etc.) between high-cost and low-cost jurisdictions.
  • Other local market features: These are attributes of local markets (such as purchasing power and product preferences of households in the market, growth rate of the economy adding to increased demand for the products, and degree of competition in the market) that may allow a company to obtain a price premium for its products and/or gain access and proximity to growing local and regional markets, allowing it to gain a competitive advantage through scale economies in sale or production.

Although the guidelines do not provide a formal definition of LSAs, they do provide guidance on the concept of location savings and refer to other local market features that are synonymous with the concept of LSAs. This article addresses some key issues in the guidance related to LSAs and compares it to the positions adopted by China and India.

To read the rest of the article, download the full collection at the top of the page.

It sometimes takes only subtle changes in tax law or guidance to cause significant practical consequences for taxpayers. The OECD’s view on how the arm’s length principle applies to estimating the creditworthiness of affiliates, as set out in just a few additional paragraphs in Chapter I of the Transfer Pricing Guidelines, has not necessarily been a headline issue for the OECD BEPS project.

However, given the significant flows of debt funding within multinational groups, along with the common use of parental guarantees to allow subsidiaries to access local debt markets, any changes may have significant potential ramifications. It may also create many practical interpretation challenges for multinational enterprises. This uncertainty may raise the likelihood of more tax disputes between taxpayers and revenue authorities and also between revenue authorities.

This article provides some context to the issue of “passive association” and implicit credit support that may be provided within multinational groups. It includes an explanation of the OECD’s new position on this issue, why it matters, and the practical consequences for multinationals, specifically within the context of debt arrangements.

One clear implication of the changes made by the OECD is that it will be necessary for multinationals to take a position on this issue, both at a global policy level and in setting and defending interest rates and guarantee fees on a transactional basis. In addition, many taxpayers will need to prepare to be challenged by tax authorities citing the new guidance as a basis for interpreting the arm’s length principle.

To read the rest of the article, download the full collection at the top of the page.

The revisions to Chapter VI of the Transfer Pricing Guidelines contain some of the most significant changes adopted by the OECD/G20 under its BEPS mandate to achieve acceptable transfer pricing outcomes are consistent with value creation.

This article looks at the new guidance on risk consistent with changes to Chapter I – the returns to capital – and place significant emphasis on the returns to the important functions related to the development, enhancement, maintenance, protection and exploitation of intangibles, and discusses how the new guidance will likely drive significant changes to current practices.

In most respects, the final guidance is unchanged from the previous drafts. It adopts a broad definition of intangibles to preclude arguments that valuable items fall outside the scope. This expansive approach is similar to that of recent domestic rule-making in many countries.

The new guidance defines an intangible as something:

The new guidance defines an intangible as something:

  1. That is not a physical asset nor a financial asset;
  2. That is capable of being owned or controlled for use in commercial activities; and
  3. Whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. In commercial terms, this would include (but not be limited to) “intellectual property.”

To read the rest of the article, download the full collection at the top of the page.

The hard-to-value intangibles recommendations included in the final report on BEPS Actions 8-10 are intended to address perceived information asymmetries between tax administrations and taxpayers whereby tax administrations may lack access to information, be too reliant on "specialized knowledge, expertise, and insight" provided by the taxpayer, or be incapable of determining whether the differences between projected results used to set the transfer pricing (ex-ante) and the actual results (ex-post) were due to unforeseen developments or inappropriate transfer pricing.

The OECD initially considered the use of special measures that may have operated outside the arm's length principle, including the recharacterization of intangible transactions and the application of other anti-abuse provisions. However, the OECD ultimately adopted an approach consistent with the US "commensurate with income" rules, which are deemed to be consistent with the arm’s length principle.

These rules are intended to encourage multinational enterprises to include price adjustment or other contingent pricing mechanisms in their license agreements when the value of the intangible being transferred is highly uncertain.

To read the rest of the article, download the full collection at the top of the page.

For efficiency reasons, the headquarters of multinational enterprises (MNE) often provide affiliates with a variety of intercompany support activities. Typically, these services fall into one of the broad categories of support, including human resources, finance, information technology, legal services, and marketing. With the rise in volume of cross-border transactions and intensifying competition among MNE groups, companies often centralize the entire range of intragroup services in a single low-cost location to bring efficiency and avoid duplication of services. This trend led to the creation of intragroup shared service centers.

The OECD's final report on Actions 8-10 of the BEPS project, Aligning Transfer Pricing Outcomes with Value Creation, includes a section on "Low Value-Adding Intra-Group Services-Revisions to Chapter VII of the Transfer Pricing Guidelines." This guidance introduces an elective, simplified approach to determining whether the service charge is due (the benefit test) and calculating the arm’s length charge in the case of low-value-adding services.

Unlike the existing guidelines, the new guidelines state that if taxpayers elect to use the simplified approach to document low value-adding intragroup services, they only need to demonstrate that a benefit was received by the group members within the specific categories of services, rather than specifying the specific benefits received by group members. Once implemented by individual tax administrations, the simplified approach is likely to reduce the burden taxpayers face in preparing the documentation of low value-adding intragroup services.

To read the rest of the article, download the full collection at the top of the page.

Cost contribution arrangements (CCAs) are contractual arrangements entered into to allow parties to share the contributions and risks involved in either:

The development, production, or acquisition of intangible or tangible assets, or

The execution of services, with an expectation that the parties will enjoy the anticipated benefits to be derived from their contributions equitably.

The OECD's new transfer pricing guidelines may require participants that provide funding to significantly increase substance around such arrangements and, in many cases, to change the method of valuing CCA contributions. Companies may find that the new guidelines eliminate much of the economic benefit of these arrangements in some situations.

This article sets out an overview of the final CCA guidelines, summarizes relevant points of departure from the draft guidelines, and identifies practical considerations for multinational enterprises considering entering into a CCA, or the burdens of continued compliance under an existing CCA.

To read the rest of the article, download the full collection at the top of the page.

The revised Chapter V of the OECD's Transfer Pricing Guidelines contains new standards for transfer pricing documentation. The guidelines recommend that individual jurisdictions adopt a three-tiered approach to transfer pricing documentation:

  • A master file with global information about a multinational corporation group, including specific information on intangibles and financial activities, that is to be made available to all relevant country tax administrations;
  • A local file with detailed information on all relevant material intercompany transactions of the particular group entity in each country; and
  • A country-by-country report of income, earnings, taxes paid, and certain measures of economic activity.

This article discusses the new guidance, which will change the documentation process fundamentally and significantly increase MNEs’ transfer pricing compliance burden, because it requires most MNEs to gather and provide to the tax authorities substantially more information on their global operations than they have previously provided.

To read the rest of the article, download the full collection at the top of the page.

The goal of Action 14, "Making Dispute Resolution Mechanisms More Effective," is to develop solutions to address obstacles that prevent countries from resolving treaty-related disputes under mutual agreement procedures (MAP), including the absence of arbitration provisions in most treaties, and the fact that access to MAP and arbitration may be denied in certain cases.

Although Action 14 is directed at tax authorities, taxpayers could benefit significantly from these actions by permitting timely resolution of disputes consistent with double tax treaties and the reduction in the number of cases of double taxation.

The Action 14 report includes references to Action 15, "Developing a Multilateral Instrument to Modify Bilateral Tax Treaties," which will be critical to implementing the recommendations of Action 14. The multilateral instrument negotiations, which will include mandatory binding arbitration, have recently been joined by the United States.

This article discusses the guidance on Action 14-including the minimum standard and best practices for dispute resolutions.

To read the rest of the article, download the full collection at the top of the page.


Aengus Barry

Deloitte UK, London 

Fiona Craig

Deloitte Australia, Sydney 

Philippe Penelle

Deloitte US, Washington, DC

Anis Chakravarty

Deloitte India, Mumbai 

Shanto Ghosh

Deloitte US, Boston 

Eunice Kuo

Deloitte China, Shanghai

Geoff Gill

Deloitte Australia, Sydney 

Kevin Gale

Deloitte Canada, Winnipeg 

Bill Yohana

Deloitte US, New York

John Henshall

Deloitte UK, London 

Alan Shapiro

Deloitte China, Tokyo

Keith Reams

Deloitte US, San Francisco

Richard Schmidtke

Deloitte Germany, Munich 

Sajeev Sidher

Deloitte US, San Jose

Shannon Blankenship

Deloitte US, Denver 

Mudigonda Vishweshwar

Deloitte India, Bangalore 

Rafal Sadowski

Deloitte Poland, Warsaw

Jacqueline Doonan

Deloitte US, San Francisco 

Ramón López de Haro

Deloitte Spain, Madrid

Mark Nehoray

Deloitte US, Los Angeles 

Jeroen Lemmens

Deloitte Switzereland, Zurich 

Yoshihiro Adachi

Deloitte Japan, Tokyo

Kerwin Chung

Deloitte US, Washington, DC 

Alan Shapiro

Deloitte Japan, Tokyo 

Kirsti Longley

Deloitte US, Washington, DC

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