The Organisation for Economic Co-operation and Development (OECD) earlier this week released a discussion draft—BEPS Action 10: Discussion Draft on the Use of Profit Splits in the Context of Global Value Chains)—under the OECD’s base erosion and profit shifting (BEPS) project.
Read the BEPS Action 10 discussion draft [PDF 402 KB]
The OECD identified three actions related to determining that transfer pricing outcomes are in line with value creation in its BEPS action plan.One of these three actions is Action 10 (other high-risk transactions) that calls for developing rules to prevent base erosion and profit shifting that arises when taxpayers engage in transactions that would not, or would only very rarely, occur between third parties.
One of the mandates of BEPS Action 10 is to clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains.
The OECD on 16 September 2014, issued a report that concerns the tax challenges of the digital economy, and that report identifies issues in the digital economy that need to be taken into account with respect to the transfer pricing work on BEPS—including the need for increased reliance on value chain analyses and profit split methods. The OECD on 16 December 2014 also released a discussion draft in accordance with this mandate.
The BEPS Action 10 discussion draft considers several key issues related to the application of transactional profit split methods, provides illustrative scenarios for each of the issues, and poses some questions for public discussion related to the issues and scenarios.
The BEPS Action 10 discussion draft notes that the included scenarios are meant for discussion purposes only and are not intended to imply that transactional profit split methods will be the most appropriate method in the circumstances outlined in those scenarios.
The key issues considered in the BEPS Action 10 discussion draft are as follows:
The BEPS Action 10 discussion draft illustrates each of the issues listed above using examples or scenarios, followed by questions intended to elicit responses from the public. In addition, the discussion draft invites comments on the relevance of transactional profit split approaches to hard-to-value intangibles.
The discussion draft includes the current text of the OECD Transfer Pricing Guidelines related to the application of transactional profit splits, along with the text of Examples 17 and 18 from the intangibles guidance in an annex for reference.
The OECD invites public comments on the discussion draft, which are to be submitted by 6 February 2015. A public consultation on the discussion draft and other matters will be held in Paris on 19-20 March 2015.
The OECD has taken a consultative approach on the issue of profit splits, laying out issues for consideration and inviting comments from the public by posing both targeted questions related to the issues and also open-ended ones. It does not provide recommendations, but rather directs the discussion to issues the OECD believes are important. This early consultation with stakeholders is viewed as a useful approach in this difficult area.
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