Safe Harbors Gain Momentum


Safe harbors have become a big part of the transfer pricing debate over the past year. This is not surprising given the ever-greater need for certainty and the growing discomfort—from some sectors at least—with the arm’s-length standard.

Today’s issue of Transfer Pricing Report contains three items on safe harbors: a review of the Organization for Economic Cooperation and Development’s June 6 draft on safe harbors and proposed memoranda of understanding to be used by countries’ competent authorities; a request by three U.S. practitioners for the Internal Revenue Service to establish comparables sets and acceptable ranges for routine, low-value services regardless of the size of the transaction; and a letter from the United States Council for International Business expressing support for the OECD draft.

In the first item, Patricia Lewis of Caplin & Drysdale in Washington, D.C., who in 2011 advocated wider use of safe harbors, describes the OECD’s change of heart toward the simplification mechanisms and offers a critique of the June 6 draft, focusing mainly on the MOUs. Overall, she says, the OECD draft “demonstrates a willingness to tackle a difficult and controversial subject and does so in a measured but proactive way.”

In the second item, two Boston practitioners—Lewis Greenwald of Sullivan & Worcester and Jill Weise of Ceteris Group—and Sean Foley of KPMG LLP in Washington, D.C., advocate safe harbors for services transactions. In presenting their draft paper in New York last month, Greenwald asked, “Isn’t it time we take low value added services off the table and focus on the things that really matter, like intellectual property transfers?” While the three would like to see the IRS offer safe harbors for services transactions regardless of their size, implicit in the request is the notion that even large transactions for services are unlikely to drive profit for most companies.

Finally, the chair of the USCIB’s taxation committee, William Sample, expressed strong support for the OECD draft and MOUs. Sample, Microsoft Corp.’s vice president of worldwide tax, highlighted several features of the proposed agreements “that we hope would be adopted in any actual MOU,” including that taxpayer results satisfying an MOU benchmark would be accepted as arm’s-length by all countries agreeing to the MOU.

Sample’s main criticism of the draft agreements is that the criteria for determining eligible taxpayers and transactions are too restrictive. Among other things, he suggests the MOUs should allow a qualifying enterprise to enter into contracts covering multiple transactions with multiple affiliates.

When the chief criticism of a concept is that it should apply more broadly, that concept is gaining ground.