TEI comments on OECD profit split guidance.

• Position: Organisation for Economic Co-operation and Development

On September 4, 2016, Tax Executives Institute, Inc., filed a letter with the OECD commenting on its public discussion draft regarding Revised Guiddiice on Profit Splits. The Institute's comments focused on the need for clear guidance regarding how the transaction profit split method of setting transfer prices should be applied in practice and the limited settings in which the method is appropriate. TEI's comments were prepared under the aegis of the Institute's European Direct Tax Committee, whose chair Is Nick Hasenoehrl. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of the Institute's comments.

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The Organisation for Economic Co-Operation and Development (OECD) published final reports pursuant to its base erosion and profit shifting (BEPS) project on October 5, 2015. The reports were the culmination of the OECD's Action Plan on Base Erosion and Profit Shifting (hereinafter the Plan) published in 2013. The Plan set forth 15 actions the OECD would undertake to address a series of issues that contribute to the perception of tax bases being eroded or profits shifted improperly. Included in the October 2015 final reports was a report under Actions 8-10 of the Plan, Aligning Transfer Pricing Outcomes with Value Creation. Subsequently, the OECD issued a public discussion draft under those actions on 4 July 2016 (the Discussion Draft), requesting comments regarding revised guidance in Chapter II of the OECD Transfer Pricing Guidelines (the Guidelines).

I am pleased to respond to the OECD's request for comments on behalf of Tax Executives Institute, Inc. (TEI). TEI also requests the opportunity to speak in support of these comments at the public consultation to be held on October 11-12, 2016, in Paris.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 56 chapters in Europe, North and South 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 individual members represent over 2,800 of the leading companies in the world. (1)

General Comments

TEI commends the OECD for its continued work on issues regarding base erosion and profit shifting, even as the "final" reports under the Plan were issued more than ten months ago. Issues and controversy surrounding transfer pricing, including the use of the transactional profit split method, continue to be of significant concern to multinational enterprises (MNEs) as well as tax authorities around the world. TEI particularly appreciates the confirmation in the Discussion Draft that not only should profits be shared among associated enterprises under the transactional profit split method, but that losses among associated enterprises must be shared as well.

Overall, the Discussion Draft depicts two approaches to splitting profits. The first approach splits anticipated profits from a transaction and the second splits actual profits. The content of the Draft focuses in great measure on splitting actual profits based upon a very detailed economic analysis and transaction monitoring. This is a difficult approach to administer. In light of this difficulty, in TEI's view, more guidance is needed on how to properly perform a profit split analysis. In general, one-sided methods are easier to apply in practice and are less subjective. On the other hand, the profit split method has historically not been used as frequently because of its subjective element, although it does provide for greater flexibility in application. Moreover, developed markets tend to prefer one-sided methods while developing countries--which tend to have no or significantly fewer comparables--view profit splits as an attractive option. To avoid this natural bias, additional guidance would be helpful to assist tax administrators in applying the profit split method properly. In that regard, TEI recommends that splits of actual profits, as opposed to anticipated profits and excluding those contractually provided for between the parties, be limited to cases of abuse.

Finally, TEI is concerned that in the current economic environment there is a substantial risk that the first jurisdiction to audit a taxpayer will use the profit split method, or even formulary apportionment, to propose significant adjustments in an attempt to obtain the largest share of an MNEs profits as possible. This would lead to increased controversy and litigation as other countries propose their own adjustments. Such an...