The Organization for Economic Co-operation and Development (“OECD”) released a discussion draft on transfer pricing documentation and country-by-country reporting on January 30, 2014. This document is an important development as tax authorities adopting these policies would require substantial new disclosures of multinationals’ profit allocations by country.
The OECD’s membership consists of 34 countries working together on numerous economic matters, including taxation. OECD members include the US and most developed countries, plus several developing countries. The OECD’s Transfer Pricing Guidelines serve as the foundation for many tax authorities’ transfer pricing rules and regulations. Many transfer pricing laws and audit procedures explicitly refer to the OECD’s Transfer Pricing Guidelines.
How Would New Global Transfer Pricing Guidelines Affect Multinational Businesses?
The draft guidelines recommend that multinational companies should disclose to tax authorities their revenues, operating income, and income taxes paid on a country-by-country basis.
Under the proposed revisions multinationals would need to present detailed information on their global allocation of taxable income to every tax authority where they operate. The proposed template for reporting would also require information on business activities, employee numbers, royalties, service fees, and “place of effective management” among other items.
Disclosure of taxable income and tax payments on a country-by-country basis would provide tax authorities with unparalleled access to a taxpayer’s financial information. Furthermore, we anticipate some tax authorities would use these details as justification for ever-larger shares of global taxable income. Companies undergoing prolonged tax disputes may ultimately face double tax.
What Can Multinational Companies Do to Prepare?
Companies can take proactive steps to mitigate the risks by:
- Developing intercompany agreements which clarify each company’s roles, risks and intangible ownership by country;
- Preparing transfer pricing documentation or benchmarking studies to justify the profit margins or pricing charged across borders; and
- Instituting transfer pricing policies and procedures to manage intercompany pricing and monitor profits during the year.
All three tools can strengthen the company’s position when defending intercompany pricing during any transfer pricing audit. Most crucially, transfer pricing studies need to justify intercompany pricing to tax authorities on both sides of a transaction.
Bottom line, this OECD discussion draft represents an important milestone in a coordinated international strategy for increasing the tax transparency of multinational corporations.
The revised Guidelines are expected to be finalized during May 2014, but no timeline for implementation has been announced. A copy of the draft, including the proposed template for global reporting of income, is available online.
Public comments regarding the discussion draft may be submitted through 23 February 2014.