Key features of the final report - ‘Aligning Transfer Pricing Outcomes with Value Creation’
The report ‘Aligning Transfer Pricing Outcomes with Value Creation’ regarding Action 8 (‘report’) contains new guidance on three key areas that relate to high-risk transactions.
The ‘commodity transactions’ section of the report contains an addition to Chapter II of the OECD Transfer Pricing Guidelines. It seeks to address a perceived area of BEPS observed in intra-group commodities sale/purchase transactions. The guidance advocates more use of publicly available market data (i.e. from quoted exchanges) and the adoption of a deemed pricing date for commodity transactions in the absence of evidence of the actual pricing date. These measures are aimed at creating a consistent set of rules to determine the arm’s length price for commodity transactions. Additional guidance clarifies that the comparable uncontrolled price method can be an appropriate transfer pricing method for commodity transactions between associated enterprises. Also, guidance on comparability adjustments to the quoted prices was provided. According to the OECD, the creation of greater consistency in the way tax administrations and taxpayers determine the pricing of commodities under the arm’s length principle not only reduces the opportunities for BEPS, but also benefits multinational corporations by minimizing the instances where double taxation may occur.
Low value-adding intra-group services
The ‘low value-adding intra-group services’ section of the report provides guidance as to the types of services which can be considered low value adding. These services would be priced using a safe harbor net cost plus mark up of 2 to 5 percent, thus reducing the compliance burden in these cases. Adapting this simplified approach will result in enhanced transparency. The OECD has announced that providing implementation guidance on low value-adding intra-group services will follow in the near future.
The use of profit splits in the context of global value chains
Additional guidance is provided on the application of transfer pricing methods, in particular transactional profit split methods, in the context of global value chains. The new guidance addresses nine scenarios where according to the OECD it may be more difficult to apply one-sided transfer pricing methods to determine transfer pricing outcomes that are in line with value creation and application of a transactional profit split method may be appropriate. The report concludes that the intended scope reflected in the report will form the basis for draft guidance to be developed during 2016 and expected to be finalized in the first half of 2017. More specifically, improved guidance needs to clarify the circumstances in which the profits splits are the most appropriate method for a particular case and to described what approaches can be taken to split profits in a reliable way.
The OECD has announced that additional guidance will be developed on financial transactions.
Impact of Action 10 for the Netherlands
With the release of the report of Action 10, it needs to be seen which additions and/or changes to the existing Dutch guidance are required.
With respect to the remuneration of low value adding services, the report is explicit in the remuneration being a net cost plus mark up of 5 percent. Although the 2013 Decree provides guidance on ‘supporting services’, no specific mark-ups have been mentioned. Therefore, the 2013 Decree may need to be amended to reflect the guidance on these services.
Provided that Transfer Pricing Coordination Group (TPCG) of the Dutch tax administration has doubled in size recently, it is expected that there will be more scrutiny on high-risk transactions. Contractual allocation of risk without sufficient control will not be regarded at arm’s length, as economic reality is likely to prevail over legal reality.