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OECD: Impressions concerning proposed Transfer Pricing Guidelines revisions

OECD: Impressions, proposed TP Guidelines revisions

The Organisation for Economic Co-operation and Development (OECD) last week released a discussion draft with respect to revisions to Chapter I of the Transfer Pricing Guidelines (including risk, recharacterisation, and special measures) under Actions 8, 9 and 10 of the base erosion and profit shifting (BEPS) action plan.


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Read the discussion draft for BEPS Actions 8, 9 and 10 [PDF 315 KB]

The following provides initial impressions of the discussion draft released on 19 December 2014.


The OECD identified three actions related to ensuring that transfer pricing outcomes are in line with value creation in its BEPS action plan.

In September 2014, the OECD released guidance on one of these actions—Action 8 on the transfer pricing of intangibles. In that guidance, the OECD acknowledged that some transfer pricing issues related to intangibles are closely interlinked with guidance covered under Actions 9 (Risk and capital) and 10 (Other high-risk transactions). Given this interdependence between Actions 8, 9 and 10, the OECD decided to provide guidance related to certain issues common to these actions under one discussion draft.

The BEPS Actions 8, 9 and 10 discussion draft (Discussion Draft) contains guidance related to the following closely related topics under Actions 8, 9 and 10:

  • Rules or special measures to prevent base erosion and profit shifting that arises from the transfer of risks, or allocation of excessive capital to group members
  • Clarification of circumstances in which transactions can be recharacterized
  • Transfer pricing rules or special measures for transfers of hard-to-value intangibles

The OECD noted that the Discussion Draft does not represent the consensus views of the drafters.

Overview of the BEPS Actions 8, 9 and 10 discussion draft

The Discussion Draft contains two parts.

  • Part I of the Discussion Draft contains proposed revisions to Section D of Chapter I of the OECD’s Transfer Pricing Guidelines. The proposals in this part are intended to provide guidance within the framework of the arm’s length principle. The Discussion Draft notes which sections or paragraphs are unchanged from the existing guidance, slightly modified or substantially modified, and which are entirely new.
  • Part II of the Discussion Draft sets out some options for special measures outside the arm’s length principle. The options set in Part II have close interaction with other actions under the BEPS action plan, including BEPS Action 3 on strengthening CFC rules and BEPS Action 4 on interest deductions.

Part I of the Discussion Draft

Part I of the Discussion Draft provides guidance for applying the arm’s length principle, at the heart of which lies a “comparability analysis.” The guidance identifies two key aspects of a comparability analysis:

  • The delineation of the controlled transaction through the identification of the conditions surrounding it
  • A comparison of the conditions of the controlled transaction with uncontrolled transactions

Part I of the Discussion Draft focuses on the first of these two aspects. It emphasizes the importance of accurately delineating the features of the controlled transaction, which then form the basis for comparison with uncontrolled transactions under the existing guidance found in Chapters II and III of the Transfer Pricing Guidelines.

Identifying the actual commercial and financial relations

In order to delineate the controlled transaction, the Discussion Draft emphasizes identifying actual conduct of the parties. The process of identifying the actual conduct—i.e., the actual commercial and financial relations between the parties—in order to accurately delineate the transaction involves identifying the economically relevant characteristics of the transaction. These include the contractual terms of the transaction, the functions performed, the characteristics of the property transferred, the economic circumstances of the parties and their business strategies. The Discussion Draft provides detailed discussion of these characteristics—much of this discussion is carried over from the existing Chapter I, Section D guidance with some additions, mainly in the discussion of functional analyses.

Identifying risks in commercial and financial relations

The Discussion Draft adds a substantially new section on identifying risks in commercial or financial relations between controlled parties to a transaction. It includes a lengthy discussion of the nature and sources of risk, the allocation of risks in contracts, how risks are assumed, the potential impact of risk, risk management, and identifying the actual conduct of the parties related to risk. The discussion on risk borrows concepts from Chapter IX on business restructurings, in particular, the concepts of control over risk and allocation of risk.

In addition, the Discussion Draft discusses several issues core to identifying risks in commercial and financial relations between parties on which it specifically invites comments before final guidance is drafted. These issues involve the extent to which associated enterprises can be assumed to have different risk preferences while they may also in fact be acting collaboratively in a common undertaking under common control. A number of these issues are broadly grouped into the following two categories:

  • Moral hazard - The term “moral hazard” refers to the lack of incentive to guard against risk when one is protected from its consequences. Unrelated parties often incorporate terms into their contracts to safeguard against moral hazard. The Discussion Draft invites comments on the implications of moral hazard for the arm’s length principle.
  • Risk-return trade-off - Risk-return trade-off implies the equivalence on a present value basis between a higher but less certain stream of income and a lower but more certain stream of income. The Discussion Draft poses several questions related to the implications of risk-return trade-off under the arm’s length principle.

The Discussion Draft also requests comments on distinctions to be made in the guidance on risk transfers for application to the financial services sector.


The Discussion Draft notes that in exceptional circumstances, the transaction as accurately delineated may be disregarded for transfer pricing purposes. The Discussion Draft adds a substantially new section on these circumstances. It introduces the concept of fundamental economic attributes of arrangements between unrelated parties, which gives greater definition to the test of commercial rationality discussed in the existing Chapter I. An arrangement exhibiting the fundamental economic attributes of arrangements between unrelated parties would offer each party a reasonable expectation to enhance or protect its commercial or financial position on a risk-adjusted basis, compared to other opportunities realistically available to them at the time of the transaction.

Specific considerations and location savings and other local market features

The Discussion Draft carries over the section on specific considerations unchanged from the existing Chapter I guidance. The specific considerations include losses, the effect of government policies and the use of customs valuations. Further, the Discussion Draft adds, with no changes, the section on location savings and local market features first released along with the report on intangibles.

Part II of the Discussion Draft

The Discussion Draft notes that even if all the changes proposed to Chapter I are implemented, certain BEPS risks may remain. These mainly relate to information asymmetries between taxpayers and tax administrations and the relative ease with which taxpayers can allocate capital to low-tax entities with minimal functions. Part II of the Discussion Draft outlines options for special measures to address these BEPS risks.

The special measures are broadly outlined, and the OECD envisions undertaking substantial work related to them.The OECD invites respondents to comment on the special measures outlined in the Discussion Draft, individually and also on a comparative basis. The special measures contemplated are as follows:

  • Special measures for hard-to-value intangibles
  • Assigning no return to a capital-rich, asset-owning company that has no or little ability to generate return from the asset under the assumption that it would not provide a rational investment opportunity to an independent investor
  • "Thick capitalization rule” based on pre-determined capital ratio
  • Special measure focusing on a level of functionality that, where lacking, would cause the profits of that entity to be reallocated
  • Ensuring appropriate taxation of excess returns

Next steps

The OECD invites public comments on the Discussion Draft, due by 6 February 2015. A public consultation on the Discussion Draft and other matters will be held in Paris on 19-20 March 2015.

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