TEI comments on OECD transfer pricing documentation and CbC reporting draft: February 22, 2014.

• Position: Tax Executives Institute, Organisation for Economic Co-operation and Development, Country-by-Country

On Feb. 22, 2014, TEI submitted comments to the OECD recommending substantial changes to the OECD's revisions to Chapter V of its Transfer Pricing Guidelines included in its Discussion Draft on Transfer Pricing Documentation and CbC Reporting. TEI's recommendations included, among other things, delaying and substantially revising the proposed Country-by-Country reporting template, balancing tax authorities need for information against the compliance burden on taxpayers, and keeping taxpayer information confidential. The Institute also provided detailed responses to the OECD's specific requests for comments in the draft. TEI's comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Nick Hasenoehrl of Herbalife. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's comments.

On 19 July 2013, the OECD published an Action Plan on Base Erosion and Profit Shifting (the Action Plan or the Plan) setting forth 15 actions the OECD will undertake to address a series of issues that contribute to the perception that individual countries' tax bases are being eroded or profits shifted improperly. Pursuant to Action 13 of the Plan, "Re-examine transfer pricing documentation," on 30 January 2014, the OECD issued a Discussion Draft on Transfer Pricing Documentation and CbC Reporting (Discussion Draft or Draft). The Discussion Draft sets forth a proposal to revise Chapter V--Documentation of the OECD Transfer Pricing Guidelines (Guidelines). The proposed revision includes a model template for country-by-country (CbC) reporting of certain information the OECD deems relevant to an analysis of transfer prices.

On behalf of TEI, I am pleased to submit this letter outlining the Institute's core points on the Discussion Draft, as well as an Annex with detailed comments from TEI members on the Draft, including responses to the OECD's specific requests for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organisation has 55 chapters in Europe, North America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 members represent over 3,000 of the largest companies in Europe, the United States, Canada, and Asia.

Core TEI Points Regarding the Discussion Draft

TEI welcomes the opportunity to comment on the extremely important subject matter of the Discussion Draft, especially the newly created CbC reporting template. These topics, more than any others, constitute the portion of the OECD's Base Erosion and Profit Shifting (BEPS) project that touches the daily lives and operations of TEI's members and their employers. We recognise that the OECD has been tasked to provide guidance and recommendations on a wide variety of issues under Action 13 within a very short timeframe and generally outside of its normal stakeholder consultation process. Immediately below we set forth our core points regarding the Discussion Draft and closely related issues. Following our core points, the Annex provides detailed comments on the Discussion Draft, including the Institute's responses to the OECD's specific requests for comments.

1. It is regrettable that the OECD is rushing to finalise the CbC reporting template on the shortest possible deadline in the Action Plan--September 2014--giving stakeholders a mere 25 days to comment on the template (and the Discussion Draft generally). Indeed, the Draft itself notes that "it reflects limited consideration of the issues in the short time since the publication of the Action Plan...." (1) Because the template, and transfer pricing documentation generally, is about gathering information, a better approach would be to first complete the other Action Plan items. Then the OECD could determine, based on the output of those other items, what information is necessary to implement them and devise the documentation and CbC reporting standards at the end of the BEPS project. Instead, the OECD has done the reverse. By proceeding in this manner, the OECD introduces the significant possibility that the CbC reporting template will become obsolete after the OECD completes the other BEPS action items and countries begin to implement the OECD's recommended changes to the international tax system. At that point, after expending a substantial amount of resources to make the necessary systems, operational, and other changes to gather the information necessary to populate the original CbC reporting template, MNEs will be faced with making a second round (or more) of systems and other changes as the international tax rules evolve in response to the BEPS project.

   For these reasons and others, the CbC reporting template is a critical issue for business. TEI strongly recommends the OECD sever the template from the Discussion Draft and delay the deadline for a final template to December 2015. This would allow both the OECD and stakeholders to give the template full consideration in a more realistic timeframe.

2. The Discussion Draft reflects the OECD's regrettable recent trend of minimising the importance of contracts between related parties for transfer pricing purposes and thus continues to undermine the arm's length principle. Parties doing business at arm's length operate by adherence to contract, but it appears that the OECD views this as insufficient for associated enterprises in many cases. Thus, the OECD continues to move toward giving tax authorities' the OECD's blessing to recharacterise many legitimate commercial transactions and developing mechanisms that may be used for formulary apportionment purposes, such as the CbC reporting template.

3. The Discussion Draft imposes additional layers of complex and multi-jurisdictional transfer pricing documentation guidelines on top of the already costly and time consuming guidelines currently in place. This added complexity will only increase once countries integrate the final revisions to Chapter V into domestic law. The country-specific information proposed to be shared across jurisdictions is particularly problematic. It has been the experience of TEI's members that once tax authorities receive such information, particularly in regard to in-country profitability, they tend to focus on it to the exclusion of all else, such as obvious cross-jurisdictional market differences. Taxpayers are thus reluctant to turn over such information. All told, the information required by the Discussion Draft will result in increased compliance costs and tax controversy, with little additional revenue for governments. TEI recommends that instead the OECD adopt a "less is more" approach, limiting transfer pricing documentation requirements to information that is useful for risk assessment purposes, putting the emphasis on substance rather than form to ensure compliance. Local authorities could then request more detailed and exhaustive information (if necessary) on audit.

4. Much of the information to be disclosed under the Discussion Draft likely runs afoul of privacy and other information protection legislation in many countries and the European Union (e.g., the EU Data Protection Directive). This is particularly true of the CbC reporting template. Companies will therefore refuse to provide protected information and courts will refuse to enforce the requested disclosure unless there is an accompanying change in local law. There is little indication that the OECD recognises this as an obstacle to its revisions to Chapter V, particularly the approach of mandating certain documentation and information. The OECD should therefore revise the Discussion Draft with these legal concerns in mind.

5. The Discussion Draft lacks the flexibility provided in current Chapter V by mandating certain information and documentation formats. Flexibility is critical for multi-national enterprises (MNEs) to collect and present transfer pricing documentation in a manner that best fits the MNE's reporting systems at a reasonable cost, and best meets tax authorities' requirements for relevant information. Thus, in TEI's view, standardised forms or guidelines are too rigid an approach to transfer pricing documentation, given the vast diversity in MNE operations and organisational structures. A more flexible approach is crucial.

6. The Discussion Draft states in paragraph 12 that countries should keep "documentation requirements reasonable and focused on material transactions in order to ensure mindful compliance on the most important matters." Unfortunately, the Draft does not provide detail on what constitutes a "material" transaction nor on what are the "most important" matters, although it does request input from stakeholders on those items. In combination with the detail required by the Draft discussed above, this is likely to lead to mindless (and costly) compliance by MNEs and other businesses, and provides the opportunity for disputes between tax authorities and MNEs about the completeness of the documentation and compliance with local law. In TEI's view it is crucial that the OECD set clear transactional materiality thresholds to reduce the compliance burden on all businesses and ensure that tax administrations are not buried under a mass of irrelevant information. In addition, the OECD should establish a threshold to exclude small and medium sized enterprises (SMEs) from the Discussion Draft's most onerous requirements.

7. It is difficult to overstate the confidentiality concerns of TEI's members with respect to the highly sensitive information their employers are required to report under the Discussion Draft. For example, the Draft proposes sharing the master file with each country in which an MNE has an affiliate subject to tax. Given the wide variance in the ability and willingness of tax authorities to...