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By Philip D. Morrison, Esq.
Deloitte Tax LLP, Washington, DC
On January 30, 2014, the OECD published a discussion draft on
transfer pricing documentation and country-by-country (CbC)
reporting. The discussion draft addresses Action 13 in the July
2013 Base Erosion and Profit Shifting (BEPS) Action Plan, which
promised to "[d]evelop rules regarding transfer pricing
documentation to enhance transparency for tax administration,
taking into account the compliance costs for business."
The discussion draft responds to the views of some of the OECD's
constituent members that the existing tools - the tax return and
the transfer pricing documentation report - are insufficient for
purposes of identifying and evaluating transfer pricing results
reported by taxpayers. The draft recommends that countries adopt a
standardized approach to transfer pricing documentation that has a
two-tier structure consisting of: (1) a master file containing
standardized information "relevant for all MNE [multinational
enterprise] group members," including a CbC reporting template; and
(2) a "local file referring specifically to material transactions
of the local taxpayer."
While the proposed master file includes much of what U.S. MNEs
already report for their CFCs on Forms 5471, it also would require
additional information not currently reported to the IRS by U.S.
MNEs, including employee and balance sheet information for each
affiliate. The master file must be prepared in English.
The local file requires for each country (in each country's
language) information somewhat like, but more detailed than, that
required by current transfer pricing specific documentation
requirements. Annual affiliate financial reports would be required,
as well as "allocation schedules" showing how the financial data
used in applying the transfer pricing method used for transactions
may be tied to the annual financial statements. Financial data for
comparables would also be required. The draft also indicates that,
in performing any transfer pricing analysis, reliability requires
that taxpayers use local comparables over regional comparables when
such local comparables are reasonably available.
Many of the required elements of the local file are not
currently included in most countries' required local-country
documentation, so these requirements may create additional
compliance burdens for MNEs. Additionally, most issues open to
interpretation with respect to the required reporting are left for
local jurisdictions to determine, further complicating any
centralized preparation of the global documentation. This, in turn,
may result in an increase in the number of Competent Authority
Mutual Agreement Procedure requests by MNEs and could lead to more
bilateral and multilateral Advance Pricing Agreements (APAs).
The mechanism for sharing the master file, including the CbC
template, is open for discussion. The draft lists three
Relying on the treaty network would certainly be preferred by
most taxpayers, given the requirements imposed on tax authorities
by tax information exchange agreements (as well as the OECD Model
Treaty) to maintain taxpayer confidentiality.
The draft also acknowledges that tax authorities must ensure no
public disclosure of trade secrets, scientific secrets, or other
confidential information, presumably including confidential
financial information. There is no indication of what protections
will be put in place to safeguard such secrets, although the OECD
specifically asks for comments on this issue. This question may be
particularly troublesome to taxpayers, as many believed (or hoped)
that the global template would be available only through
information exchange procedures under treaties, rather than
possibly being directly available to any jurisdiction that asked
Equally troubling, the CbC template requires reporting of
information on tangible assets, sales, and employees located in
each country, three factors often used by states of the United
States in their formulae for the apportionment of income for state
income tax purposes. This, of course, raises the concern that tax
authorities may misuse the CbC report by drifting away from the
arm's-length standard toward formulary apportionment.
The introduction to the discussion draft states that the
overarching consideration in updating the transfer pricing
guidelines on documentation is the need to balance the usefulness
of the data to the tax authorities with any increased compliance
burden on taxpayers. However, in almost every instance, the draft
suggests increased documentation burdens and selects fairly
difficult data options. Thus, tax authorities' needs seem to always
outweigh concern for taxpayers' burdens. In addition, much of the
language describing the documentation in the master file leaves
significant room for interpretation and potential differences among
tax authorities and between tax authorities and the taxpayer. The
OECD's goal of more transparent documentation requirements will be
achieved only if all OECD countries and observers adopt common
standards, but this room for differing interpretations must be
narrowed to achieve that goal.
For almost all MNEs, these rules will require changes in
documentation processes and transfer pricing governance. The
amount of information required may create information overload and
misdirection for many tax authorities, possibly resulting in more
drawn-out audits. The recommended reporting also includes terms
that are subject to varying definitions, and it appears that,
beyond some general, common direction for some terms, each country
may define terms as it wishes. The master file and global CbC
template may increase the scrutiny of transfer pricing audits as
examiners focus on broader aspects of the taxpayer's business
activities and structure beyond the related-party transactions
currently reported. This will require more central control of
international tax and transfer pricing policies.
This commentary also will appear in the April 2014 issue of
the Tax Management International Journal. For
more information, in the Tax Management Portfolios, see Levey,
Carmichael, van Herksen, Patton, Levi, Krupsky, and Kellar, 890
T.M., Transfer Pricing: Alternative Practical Strategies
(Chapter 7, "Transfer Pricing - A Case Study (Methods and
Documentation)"), Culbertson, Durst, and Bailey, 894
T.M., Transfer Pricing: OECD Transfer Pricing Rules and
Guidelines, and in Tax Practice Series, see ¶3600,
Section 482 - Allocations of Income and Deductions Between Related
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