So what has changed as a result of BEPS? The BEPS project has resulted in a wholesale revision of the OECD Transfer Pricing Guidelines - including completely rewritten Chapters on Intangibles, Documentation and Cost Contribution Arrangements. In addition fundamental changes have been made to Chapter 1 on the application of the arm’s length principle, with the aim of aligning transfer pricing outcomes with value creation and substance (in particular the control and allocation of risks). This has been done through revised guidance reducing the role of the contract and ex ante legal arrangements, but increasing the importance of the conduct of the parties and the control of risk (who makes important decisions and where are they made). Other action items related to, but not strictly, transfer pricing are those focused on interest deductions, digital business models and permanent establishments which we expect will ultimately impact transfer pricing arrangements and business models.
Implementation of the BEPS recommendations will be key. There will be challenges in implementation as each country looks to integrate the recommendations of the OECD at the domestic level or through the multilateral instrument for treaty changes. The initial feedback from key G20 countries suggests that each country wants to maintain its sovereignty and taxing rights. This has resulted in some countries implementing new pieces of legislation before the finalisation of OECD recommendations (e.g. the UK Diverted Profits Tax, and Australian country-by-country reporting). These unilateral actions are creating confusion in the short term and put pressure on the action item on improving dispute resolution. What is becoming clearer is the consensus around a two-sided or multi-sided analysis of the facts and circumstances over the traditional one-sided approach, which was the hallmark of a pre-BEPS world, with the inherent dangers of an inappropriate shift to two-sided methods such as profit splits.
As we move into the next phase of the BEPS project, tax functions are reflecting on what they should do. The BEPS agenda and the political and social will for change has pushed transfer pricing on to the Board agenda. All multinationals will have to reflect on the changes and explain clearly how value is created in their business and determine whether their current transfer pricing policies can be explained cogently or if not, better-aligned polices need to be developed. These changes put a premium on having consistent, coherent, and cogent transfer pricing documentation and carefully considering the picture given to tax authorities by the country-by-country reporting template.