Transfer pricing

Approval of the mandate - Background Information


Business restructurings are typically accompanied by a reattribution of profits among the members of the restructured multinational group. One essential objective of the OECD project is to discuss the extent to which such a reattribution of profits is consistent with the arm’s length principle and more generally how the arm’s length principle applies to business restructurings (see Article 9 of the OECD Model Tax Convention).   In addition, business restructurings can raise permanent establishment issues, both in relation to the threshold for recognition of a permanent establishment (see Article 5 of the OECD Model Tax Convention), and to the attribution of profits to a permanent establishment once one is found to be in existence (see Article 7 of the OECD Model Tax Convention).

The mandate of the Working Group identifies three broad areas in which work is to be done:
- Recognition of transactions presented by a taxpayer. This involves issues as to when a tax administration may disregard or recharacterise specific transactions for transfer pricing purposes, and as to the acceptability and transfer pricing consequences of risk stripping and transfers of intangibles.
- Transfer pricing consequences of restructurings that are not subject to recharacterisation. Issues covered are whether, according to the arm’s length principle, there should be an indemnification or any other form of compensation upon a conversion; how to determine an arm’s length remuneration for the restructured entity and for the principal; whether the arm’s length principle applies differently to a restructured activity and to an activity that is set up as “low risk, low intangible, low added value” from the beginning; and whether and how to account for group synergies and efficiency gains in the context of a restructuring.
- Permanent establishment issues. Questions for the Working Group to consider include when a foreign enterprise can be found to have a permanent establishment further to a business restructuring, and whether further guidance is needed on the attribution of profits to a dependent agent permanent establishment. 

Although they raise important issues in the context of business restructurings, VAT and indirect taxes are not currently covered.  

The mandate given by the Committee to the Working Group recognises that on the one hand, governments want to tackle “abusive” transactions or those which lack economic substance, and that on the other hand, it is essential to work towards developing a transfer pricing and treaty analytical framework to deal with bona fide restructurings that is as clear as possible and offers sufficient certainty. One objective of the project is to ensure that business restructurings do not lead to unintended double non taxation. A second objective of this project is to limit to the extent possible risks of double taxation for multinational enterprises that wish to operate globally for sound business reasons.
In view of the sensitivity of this project and of the complexity of the issues raised, dialogue with the business community is essential and will be encouraged at different points in time and in different formats. Dialogue with the business community started with the January 2005 CTPA Roundtable which was attended by senior officials from OECD and key non OECD countries and by 40 business representatives. In 2006, a small Business Advisory Group  was formed to provide input to the Working Group at the early stages of the project. The intention is to release a discussion draft for public comment by the end of 2008.


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