The Organization for Economic Co-operation & Development (OECD) recently released the latest version of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). These guidelines establish substantially higher standards for transfer pricing compliance in an effort to curb profit-shifting. With this change, tax auditors will expect a greater amount of comprehensive transfer pricing support to reduce the risk of tax adjustments and transfer pricing penalties imposed on companies.
Why Are the New Guidelines Important?
The new guidelines serve as the international transfer pricing rulebook for tax authorities and multinationals worldwide, with respect to the arm’s-length principal. Many countries specifically reference the OECD Guidelines in domestic tax law and international tax treaties. Interpretations of these guidelines can vary by jurisdiction, however, the key expectation is that multinationals will have a well thought out explanation of their cross-border pricing results. From a practical perspective, the US transfer pricing regulations and documentation standards under IRC 482 and 6662 are largely consistent with the OECD Guidelines.
The new guidelines form part of a comprehensive global strategy to crack down on companies utilizing aggressive tax schemes under the OECD’s Base Erosion and Profit Shifting (BEPS) program. It is anticipated that companies of all sizes will be affected by these developments.
Some Clarity, Some Confusion
From Clayton & McKervey’s perspective, these guidelines provide more specific guidance on how tax authorities and companies should apply the arm’s-length principle. Some of the changes will help streamline compliance by simplifying service charge rules and comparable benchmarking updates.
Conversely, the guidelines also grant governments more latitude in claiming a greater share of profits due to special market factors. For example, it is anticipated that low-cost labor countries will expect a greater share of taxable profits by claiming that their location savings are a special market factor. These positions may create additional uncertainty for day-to-day business planning purposes.
Next Steps and Recommendations
While these transfer pricing developments are driven by global outrage over aggressive tax planning by large multinationals, companies of all sizes are increasingly questioned about transfer pricing – globally. These new guidelines provide a more sophisticated toolbox for tax auditors to challenge cross-border pricing.
Taxpayers of all sizes should revisit their transfer pricing documentation strategy with a particular focus on whether the explanations included are current, relevant and convincing. The OECD’s 2017 Transfer Pricing Guidelines can be found at oecd.org.
