On 9-10 June 2009, the OECD held a consultation with business commentators on its discussion draft on the transfer pricing aspects of business restructurings which was released for public comment in September 2008. The discussion draft had been approved for release by the OECD’s Committee on Fiscal Affairs (CFA) and had been prepared by members of the Special Session on Business Restructuring of the CFA’s Working Party No. 6, the OECD group responsible for the OECD’s Transfer Pricing Guidelines. In the context of this project, business restructurings have been tentatively defined as the cross-border reallocation of functions, assets and/or risks within a multinational enterprise. Business restructurings typically are accompanied by a reallocation of profits. The discussion draft attracted significant interest from the business community and academic world. Comments received were previously released by the OECD.
The participants in the consultation included 60 representatives from the private sector and over 70 senior officials from OECD member countries and observers.
Mr. David Ernick, the Chair of Working Party No. 6’s Special Session on Business Restructuring, opened the meeting by highlighting the importance of the consultation process and indicating that the Working Party was scheduled to meet immediately after the consultation to go through the issues once again and discuss how to take them forward. He provided participants with some background information on the project and on the consultation process.
During the two-day meeting, participants discussed a broad range of complex transfer pricing issues in relation to business restructurings. General themes included issues relating to risks of double taxation, certainty and documentation requirements. Participants then specifically discussed the circumstances in which the restructuring itself would be compensated at arm’s length; the transfer pricing consequences of risk allocation and risk transfers within multinational enterprises; and recognition, for transfer pricing purposes, of the actual transactions undertaken. The agenda for the consultation and the presentation material used by the speakers are available on line.
Mr. Pat Ellingsworth, the Chair of the Business and Industry Advisory Committee (BIAC’S) Tax Committee, said that BIAC was very pleased with the way the OECD project on the transfer pricing aspects of business restructuring had evolved. He complimented the OECD for preparing a discussion draft that laid down an excellent analytical framework for addressing very complex and contentious issues. In particular, he praised the OECD for producing a discussion paper that is based on existing concepts in general use and understood by the world tax community; for making explicit the concepts and their applications, thus allowing taxpayers to test whether those concepts are actually effective to deal with business restructurings; and for striving to reduce subjectivity in the assessment of the tax consequences of business restructurings as much as possible. He also praised the OECD for a strong drive towards convergence and consensus in the document, while recognizing that complete consensus has not yet been achieved and that further efforts in that direction were needed. Noting that business commentators had expressed serious concerns about some aspects of the discussion draft, he highlighted three particular aspects on which BIAC found that further work was especially needed: the notion of “control over risk” and the way risk is allocated within a multinational enterprise; the notion of taxing profit potential, its meaning and ramifications; and the notion of commercial rationality.
Mr. David Ernick concluded the consultation by saying that from his perspective the two days had been extremely productive as many constructive comments on important issues had been made by the private sector representatives. He felt that some of the issues could possibly be dealt with by clarifying the wording in the discussion draft in instances where there was no substantive disagreement but where it appeared that the language used had caused confusion. Further work will be needed on several notions in the draft which have caused concerns to commentators because they are subjective and open to differing interpretations, thus leaving too much room for uncertainty, as well as on those issues on which no consensus has been reached at this point. Noting that business commentators have expressed concerns primarily about risks of double taxation that arise from unclear guidance or diverging views, he said that the Working Party was committed to working to improve the discussion draft and would do its best to finalise it in a timely and balanced manner.