TEI's comments regarding the OECD's white paper on transfer pricing documentation.

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

September 30, 2013

On September 30, TEI submitted a letter to the OECD commenting on its White Paper on Transfer Pricing Documentation. TEI's comments focused on the need to reduce the transfer pricing documentation and compliance burden on taxpayers by standardizing requests for such documentation across tax authorities. The comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Alexander Kolbl of General Dynamics. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's letter.

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.

Comments on the White Paper

In General

TEI welcomes the publication of the White Paper as a good first step in the OECD's effort to standardise and simplify burdensome and costly transfer pricing documentation requirements. Tax authorities and taxpayers have much to gain from standardisation, which would allow taxpayers to focus on providing qualitative information to tax authorities rather than on meeting often inconsistent formal requirements.

We are concerned, however, that the recommendations in the White Paper may lead to an unnecessary increase in transfer pricing documentation requirements. For example, many of the countries surveyed by the OECD (1) do not request much of the information listed in Table 1 to be included in the global "masterfile." (2) In addition, adoption of the White Paper's recommendations does not guarantee a corresponding reduction in local country documentation requirements. Moreover, the provision of "global" information to local countries may result in misunderstandings or misuse of the information, leading to unnecessary additional information requests and audits.

To allay these concerns, TEI recommends that the OECD adopt an overall, global transfer pricing documentation standard that could be adopted wholesale by individual countries (including developing nations). The OECD should craft such a standard to be generally sufficient for all transfer pricing documentation purposes. To the extent individual countries decide that the global standard is insufficient, the OECD could provide a framework through which those countries could obtain additional information.

TEI agrees that transparency in transfer pricing is necessary, but it should be expected of both taxpayers and tax authorities. Tax authorities should be encouraged to consult with taxpayers throughout the audit process, rather than back-loading the discussion at the end. Further, the White Paper should explicitly state that the use of data not available to taxpayers (e.g., "secret" or "hidden" comparables) is impermissible. For the same reason, tax authorities should not use their privileged access to information that is unavailable to taxpayers regarding margins used in neighbouring jurisdictions to require taxpayers to apply the same margins in the authorities' jurisdictions (i.e., the so-called "race to the top"). Even if tax authorities are only permitted to use the margin information (or similar data) for risk assessment purposes, the chance that such information will be misused is high.

In many cases the White Paper recommends that tax authorities collect global information that is not easily available to taxpayers. Thus, we recommend in general that requests for information only be based on data that is available to a multinational enterprise (MNE) or that could be readily available.

The White Paper also recommends that tax authorities collect competitively sensitive information. Examples of such information include important drivers of business profits, a written functional analysis showing the principal contributions to value creation by individual entities within the group, and a description of the MNE's strategy for the development, ownership and exploitation of intangibles. (3) MNEs are highly sensitive to the disclosure of confidential information to competitors, particularly in countries without appropriate safeguards for taxpayer confidentiality. Because of the sensitivity of this and related information, the OECD should recommend that tax administrations maintain strict confidentiality over this data. Access should be limited to "need to know" personnel and appropriate statutory safeguards should be in place, including strong penalties for unauthorised disclosure.

Finally, we note that certain countries require that independent auditors certify a taxpayer's transfer pricing...