Developing countries have historically struggled to implement transfer pricing legislation. The recently published Toolkit seeks to address this challenge.
In the past twenty years transfer pricing legislation in the developed world has changed rapidly, becoming ever more sophisticated. However today, many developing countries still lack the resources, know-how and data to perform even basic comparability analyses. In response to these concerns on 24 January 2017 the OECD and World Bank Group (WBG) published a discussion draft entitled A Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses. The Toolkit is designed to provide developing countries tax authorities with the tools to prepare transfer pricing analyses and address the specific challenges they face in identifying comparable data. For multinational companies, in particular those involved in commodities trading and extractive industries, the Toolkit reveals the heightened interest of developing country tax authorities in transfer pricing. It is important to consider whether the Toolkit marks a significant step towards greater scrutiny of the pricing of controlled transactions in developing countries.
The Toolkit adopts a two part approach, summarising how to practically conduct a comparability analysis and then discussing approaches to applying the arm’s length principle in the absence of comparable data. This approach addresses the Toolkit dual purpose: to educate tax authorities that are less familiar with the basic concepts of transfer pricing; and to consider the specific challenges encountered by these tax authorities, as they seek to perform transfer pricing analyses.
The first section of the Toolkit provides the reader with a concise introduction to preparing a basic comparability analysis, referencing the OECD’s Transfer Pricing Guidelines (2016) and the UN’s Practical Manual on Transfer Pricing (2013) throughout. In particular, the Toolkit highlights accurately delineating a controlled transaction, prioritising substance over form, and subsequently selecting the most appropriate transfer pricing method, as critical to pricing an intragroup transaction appropriately.
The second section of the Toolkit recognises how insufficient data may limit the ability of developing countries to apply the arm’s length principle and suggests how this situation can be rectified. The Toolkit proposes a safe harbour mechanism to help overcome the data sufficiency problems encountered by developing countries. The safe harbour provisions are similar to those proposed as part of BEPS Action 10 for low value-adding services.
One of the key themes of the Toolkit is the use of local comparables. It is common practice within Europe, Asia Pacific and North America to incorporate regional comparables with comparability analyses, to ensure there are a sufficient number of comparables to calculate an arm’s length range. The Toolkit highlights that few studies have considered whether regional comparables are genuinely comparable. As such, the Toolkit recognises that ‘foreign data’ is used when market conditions are similar, rather than due to conclusive evidence that such data is comparable.
The Toolkit outlines various country risks adjustments that have been implemented to add a premium or discount to the comparables’ result (e.g. use of WACC, bond yields etc.); but notes that “there is little empirical evidence on the reliability of the proposed approaches”. Developing countries are typically less integrated in regional markets and as a result, even economies in close geographic proximity can vary substantially, limiting the use of regional comparables in calculating an arm’s length range.
Overall, it is difficult to predict the impact this Toolkit will have on the transfer pricing regimes of developing countries. However, it is important to consider the publication of this discussion document as part of a broader trend. Developing countries are increasingly recognising the importance of transfer pricing and seeking to develop the capabilities to enforce the arm’s length principle more robustly. The transfer pricing policies applied in developing countries can no longer be overlooked.
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