Transfer Pricing Monitor: December 30, 2013

OECD Meetings:

On November 12th and 13th, 2013 the OECD held a public consultation on transfer pricing topics in Paris. The meeting was attended by delegates from more than 35 countries and by more than 150 individuals including representatives from business and government. The topics discussed at the meeting included public comments on the July 30 Revised Discussion Draft on Transfer Pricing Aspects of Intangibles, public comments on the July 30 White Paper on Transfer Pricing Documentation, the Base Erosion and Profit Shifting (“BEPS”) Action Plan and the requirement to adopt a system of country-by-country (“CBC”) reporting of selected company financial data to tax administrations.

There was no consensus reached at the meeting on an approach to CBC reporting. The OECD generally wants CBC to be a transfer pricing assessment tool while Businesses were more concerned about the availability and presentation of the information as well as the expected increase in compliance costs.

The OECD Guidelines’ revised chapter on intangible property, reporting date September 2014, was heavily discussed at the meetings. Below we highlight some of the discussion topics.

  • The definition of intangibles continue to be problematic;
  • Consideration was given to creating a category called ‘marketing intangibles’ but there will likely be retention of the current concept as long as the underlying   intangibles are specific and identifiable; 
  • A position was put forward that assembled workforce was not an intangible;
  • Location savings was argued to be highly fact specific and not always present in certain countries;
  • Whether implicit guarantees were synergies or a by-product of the relationship between the parties; and
  • Legal owners of intangibles did not cede interests in those intangibles to parties that may appear to have an economic interest in those intangibles.

The BEPS report has a September 2015 expected release date while the revised chapter on intangibles has an expected release date of September 2014. The impact that these undertakings have on each other is significant. It will be interesting to observe how the OECD addresses these issues over the next two years.

Implications for Canada

The OECD’s work on BEPS and Intangible Property reflect similar concerns of the CRA. The CRA has, and continues to aggressively pursue transfers of intangible and transactions with tax havens. In today’s environment, this risk will likely increase. These transfer pricing transactions will require additional support and explanation in taxpayer’s contemporaneous documentation.

In Canada, there is a high risk of the CRA perceiving or assigning a value to a taxpayer’s intangibles that is not consistent with their industry. A more detailed description and analysis of intangibles is advised by EMG to be included transfer pricing documentation. That is, whenever a specific intangible can be identified, particularly marketing intangibles and location savings, the intangible should be included and described in the documentation. This may have not been the case previously when such intangibles provided negligible benefits. In addition, taxpayers considering restructuring, especially when tax havens are involved, should expect increased scrutiny by the CRA.