OECD: Initial impressions of discussion draft (BEPS Action 10)

OECD: Initial impressions of discussion draft

The Organisation for Economic Co-operation and Development (OECD) yesterday published a discussion draft under Action 10 relating to the transfer pricing aspects of cross-border commodity transactions, as an additional deliverable prepared under its action plan on base erosion and profiting shifting (BEPS).

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The following provides initial impressions of the BEPS Action 10 discussion draft [PDF 172 KB].


Action 10 (“Assure that transfer pricing outcomes are in line with value creation” in relation to “other high risk transactions”) of the BEPS project calls for the development of rules to prevent base erosion and profit shifting by engaging in transactions that would not, or would only very rarely, occur between third parties including base erosion payments. The OECD has said that this will involve adopting transfer pricing rules, or special measures, to provide protection against common types of base eroding payments.

The BEPS Action 10 discussion draft acknowledges that intercompany commodity transactions may be particularly relevant for commodity-dependent developing countries where a major source of economic activity, employment, revenues, and income growth are related to the commodity sector.

The OECD also described several concerns from countries related to controlled commodity transactions in the BEPS Action 10 discussion draft. For example, some tax authorities are concerned that companies have strategies that artificially pick the lowest price possible in a period. The OECD recognized that, in response to these concerns, certain countries have adopted domestic approaches for controlled commodity transactions (e.g., “so-called six method adopted by several Latin America countries”).

Overview of BEPS Action 10 discussion draft

In the BEPS Action 10 discussion draft, the OECD defined the term “commodities” as physical products for which a quoted price is used by independent parties to set prices and provided the following three proposals regarding controlled commodity transactions:

  • Use of the Comparable Uncontrolled Price (CUP) method for pricing commodity transactions and use of quoted prices when applying the CUP method. The BEPS Action 10 discussion draft proposes to clarify guidance in Chapter II of the OECD Transfer Pricing Guidelines such that: (1) the CUP method can be an appropriate transfer pricing method for commodity transactions between associated enterprises; and (2) that quoted or publicly available prices (quoted prices) (e.g., such as those from the London metal Exchange, Chicago Board of Trade, Tokyo Grain Exchange) can be used under the CUP method as a reference to determine the arm’s length price for a controlled commodity transaction. The BEPS Action 10 discussion draft also acknowledges the potential need to make comparability adjustments and that the price-setting policy for controlled commodity transactions is to be included in the transfer pricing documentation of a multinational enterprise (MNE).
  • Deemed pricing date for commodity transactions. The BEPS Action 10 discussion draft proposes to include additional guidance in Chapter II of the OECD Transfer Pricing Guidelines regarding the adoption of a deemed pricing date for commodity transactions between associated enterprises in the absence of evidence of the actual pricing date agreed upon by the parties to the transactions. Specifically, the OECD suggested that the date of shipment as evidenced by the bill of landing or equivalent documents be used, absent reliable evidence of the actual pricing data for controlled commodity transactions.
  • Potential additional guidance on comparability adjustments to the quoted price. In the BEPS Action 10 discussion draft, the OECD did not provide guidance regarding what adjustment would be performed if differences arise, or how to perform them. The OECD indicated that certain adjustments may be based on “information and costings”—which are transparent or industry standard. The OECD requested respondents to provide information regarding common adjustments or differentials applied to the quoted prices.

What’s next?

The OECD is requesting comments on the discussion draft to be submitted by 6 February 2015 and it intends to hold further public consultation 19-20 March 2015 at the OECD Conference Center in Paris, France.

KPMG observation

With the BEPS Action 10 discussion draft, the OECD has proposed several changes to the OECD Transfer Pricing Guidelines for certain items, but has not provided definitive guidance around others (e.g., adjustments). For these items, the OECD has proposed that further research is required, and has requested respondents to provide information regarding common adjustments.

Any guidance to come on adjustments will be particularly important, since most price exchanges deal with finished products—and not intermediary products. Thus, a lot of adjustment may be needed to reliably apply the CUP method.

Finally, tax professionals have noted that the BEPS Action 10 discussion draft does not address long-term pricing arrangements.

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