The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
The OECD plans to issue another discussion draft this summer on use of the profit split method for transfer pricing, a Treasury Department official and delegate to the international organization said.
“There will be another discussion draft at some point,” said Brian Jenn, an attorney-adviser in Treasury’s Office of International Tax Counsel and a U.S. delegate to the Organization for Economic Cooperation and Development’s working party on transfer pricing.
Jenn said March 27 at the Bloomberg BNA-Baker McKenzie conference in Paris that Working Party No. 6 meetings are scheduled for one week in June, with more meetings in November. “So I would expect that sometime before November there would be a discussion draft, with an opportunity to comment, and then probably a public discussion.”
“Hopefully we can get a discussion draft out in the summer,” he said.
The OECD released its most recent draft guidance on the use of the two-sided profit split method for transfer pricing in July 2016. The July draft was seen by many practitioners as walking back from language in October 2015 final guidance under BEPS Actions 8, 9 and 10 that expanded the use of the method.
Profit split methods aim to allocate income between related parties based on their relative contributions—in contrast with one-sided methods, which attempt to peg the value of assets or services based on analysis of comparable transactions. By emphasizing evaluation of the contributions of corporate entities to a supply chain or transaction, the October 2015 final BEPS guidance was perceived as supporting increased use of profit splits.
Both the 2015 final guidance and the July 2016 draft guidance resulted from the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS), its project to rewrite the global tax rules. The 2015 guidance was issued in the form of reports under various action items in the BEPS plan.
Jenn said March 27 that Working Party No. 6 received many helpful comments on the July 2016 discussion draft that were discussed at the October 2016 public consultation in Paris. “I really think that is impacting the draft going forward.”
The comments addressed many aspects of the draft, including the differences in ex ante and ex post analyses, and “what are the right considerations with regard to profit splits in both of those cases,” he said.
The working party also received comments on “integration and the relevance, or lack thereof, for determining whether it’s the most appropriate method, and comments on value chain analysis, and synergies,” he said. “So I think all of this will be taken into account.”
Jenn said the goal of the July 2016 discussion draft wasn’t to fundamentally change the considerations regarding whether the profit split is the most appropriate method under the circumstances.
There is a lot of background in chapters 1 and 6 of the OECD transfer pricing guidelines that could be relevant to determining when a profit split might be the most appropriate method to use, he said.
One of the tasks the working party has to grapple with in revising the profit split guidance is making it consistent with the changes to chapter 1 of the OECD transfer pricing guidelines with respects to risks, Jenn said. “Particularly when you are talking about an ex post profit split, or a split of actual profits. That is an agreement of the parties with respect to risks.”
Jenn said this agreement implies a certain allocation of risks among the related parties. “Namely both parties have fully assumed and shared in certain risks—a single risk, or multiple or related risks, potentially—so it was necessary to update the profit split guidance to be consistent with that.”
The new guidance in chapter 1 describes the conditions under which a related-party has economically assumed a risk under the related party contracts, Jenn said. So long as the related party controls the risk, and had the financial capacity to bear it, the risk allocation should be respected under chapter 1.
“So there is a lot more guidance with respect to risk under chapter 1 that needs to be taken into account when we are talking about a split of actual profits under a profit split,” Jenn said.
“Now with regard to chapter 6, I am not sure that chapter 6 has fundamentally affected the profit split analysis in any way,” Jenn said.
The U.S. official said “a lot is made of these DEMPE functions"—an acronym referring to developing, enhancing, maintaining, protecting and exploiting intellectual property—"but really they are just functions” related to intangibles. There may or may not be comparable functions. That is an empirical question, “but I don’t think chapter 6 fundamentally said that these things are more valuable now than we thought they were before.”
“Chapter 6 reflects what was always the model under chapters 1 through 3, which is you reward contributions of functions, assets and risks, based on a comparability analysis and the most appropriate method,” Jenn said. “I don’t see that DEMPE or anything about chapter 6 has a specific impact on considerations under the most appropriate method analysis for whether a profit split is appropriate.”
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