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).
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”).
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:
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.
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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