Quarterly Transfer Pricing Update: Issue 1, 2015

Transfer pricing continues to be a critical issue for both tax authorities and taxpayers alike and 2015 is likely to see a continuation of the key trends that started to emerge in 2013 and 2014.

Transfer pricing rules serve to allocate income earned by a Group among those countries in which the Group does business. Under the principles of transfer pricing, taxpayers are expected to evaluate the allocation of functions, risks and assets between the various Group companies in determining the arm's length price that should be applied to related party transactions.

Increasingly, due to tax planning that is primarily focused on minimising effective tax rates, multinationals are being accused of being able to use and/or misapply these transfer pricing rules and principles to essentially separate income from the economic activities that produce that income and to shift it into low-tax environments.

Tax authorities both globally and regionally are therefore focusing on transfer pricing as a key focus issue.

Global Updates

Globally, the Base Erosion and Profit Shifting ("BEPS") Action Plan continues to make strides on transfer pricing issues.

The BEPS Action Plan was commissioned by the G20 in February 2013 to provide governments with clear international solutions for fighting corporate tax planning strategies that "exploit gaps and loopholes of the current system to artificially shift profits to locations" where they are subject to more favourable tax treatment. Specifically, the Organisation of Economic Development and Cooperation ("OECD") was tasked with identifying 15 key areas and develop a plan to mitigate the artificial shift of profits.

It is interesting to note that a third of these actions are directly related to transfer pricing. Furthermore, within each action plan, additional position papers have been introduced to provide much needed clarity on key issues that continue to exist within transfer pricing. While the intentions of the OECD are noble, these additional discussion papers often end-up raising more questions.

Towards the end of December 2014, the OECD issued the following six draft discussion papers on:

Revisions to Chapter I of the Transfer Pricing Guidelines (Including risk, recharacterisation and special measures) Action 4 (Interest deductions and other financial payments) Action 14 (Make dispute resolution mechanisms more effective) of the BEPS Action Plan Two new elements of the OECD International VAT/GST Guidelines The...