Final Guidance on Transfer Pricing Released by the OECD
| DOI | http://doi.org/10.1002/jcaf.22149 |
| Published date | 01 March 2016 |
| Date | 01 March 2016 |
| Author | Caroline D. Strobel |
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© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22149
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Final Guidance on Transfer Pricing
Released by the OECD
Caroline D. Strobel
The Organization for Economic
Cooperation and Development
(OECD) has released its final
package of measures to tackle
base erosion and profit shift-
ing. This is the culmination
of the 2-year project that was
undertaken by the OECD on
the authority of the Group of
20 countries. It revises transfer-
pricing guidance away from
the “arm’s-length” principle to
one that taxes income where
the functions, assets, and risks
that give rise to the income
are located. The package also
makes changes in the dispute
resolution mechanisms that
are key to the elimination of
double taxation.
The Group of 20
countries—Australia, Austria,
Belgium, Canada, France,
Germany, Ireland, Italy, Japan,
Luxembourg, the Netherlands,
New Zealand, Norway, Poland,
Slovenia, Spain, Sweden, Swit-
zerland, the United Kingdom,
and the United States—have
declared their commitment
to providing for mandatory
binding Mutual Agreement
Procedure (MAP) arbitration
in their bilateral tax treaties as
a mechanism to guarantee that
treaty-related disputes will be
resolved within a specified time
frame. Tax practitioners have
said that they anticipate more
aggressive audits around the
world as countries implement
the recommendations.
Action 1 analyzes the tax
challenges posed by the spread
of the digital economy and
concludes that it can’t be sepa-
rated from the economy as a
whole. The report describes
rules and implementation
mechanisms to enable efficient
collection of value-added tax
in the country of the consumer
in cross-border business-to-
consumer transactions. The
OECD hopes that this will
help to level the playing field
between foreign and domestic
suppliers.
Action 2 recommends
that countries adopt domestic
rules to neutralize the effect
of hybrid mismatch arrange-
ments. Also included in the
report were changes to the
OECD Model Tax Conven-
tion to address such arrange-
ments so that the benefits
of tax treaties are granted
to hybrid entities, including
dual-resident entities, only in
appropriate cases. Theeffect of
cross-border hybrid mismatch
arrangements is the ability to
produce multiple deductions
for a single expense or a deduc-
tion in one jurisdiction with
no corresponding taxation in
the other jurisdiction. These
include payments made under
a hybridfinancial instrument
or payments made to or by a
hybrid entity.
Action 3 concerns con-
trolled foreign companies
(CFCs). The recommendations
were designed to ensurethat
jurisdictions that choose to
implement them have rules that
effectively prevent tax payers
from shifting income into
foreign subsidiaries.
Action 4 concerns the
mobility and fungibility of
money making it possible to
achieve favorable tax results
by adjusting the amount
of debt. In the report, an
entity’s net interest deduc-
tions are directly linked to
its level of economic activ-
ity based on earnings before
interest, taxes, depreciation,
and amortization (EBITDA).
The approach includes three
parts: a fixed ratio rule based
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