Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes
June 2018
The BMG has made a submission to the OECD public consultation on possible revisions to Chapter IV of the OECD Transfer Pricing Guidelines on Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes. It is available here.
Summary
In our view, the main efforts of Working Party 6 should be directed at trying to avoid transfer pricing disputes, in particular by introducing simplified transfer pricing methods. This aspect has been sorely neglected, indeed completely ignored, during the BEPS project. Instead, disputes are likely to increase substantially, mainly because the BEPS project outputs under Actions 8-10 on transfer pricing have made the OECD Transfer Pricing Guidelines (TPGs) far more complex and obscure. Recognising this, considerable work has been done on improving the mutual agreement procedure (MAP) for resolving disputes, including the introduction of arbitration. However, this will prove a Sisyphean task in the absence of initiatives to prevent disputes from arising in the first place, especially in relation to transfer pricing.
The introduction of simplified transfer pricing methods could both improve the effectiveness of transfer pricing administration and, if well designed, reduce disputes. This is important for all tax administrations, which are increasingly under resource constraints, but especially for those of developing countries.
On the other hand, we consider it inappropriate to continue to rely on the Mutual Agreement Procedure (MAP), especially as currently operated, and with the addition of arbitration, as a means of resolving transfer pricing conflicts. These conflicts have been increasing for the past 20 years, mainly due to the adoption by the OECD in the 1995 Transfer Pricing Guidelines of an extreme version of the arm’s length principle. This requires each affiliate of a multinational enterprise (MNE) to be audited individually based on its ‘facts and circumstances’ and applying a functional analysis, followed by a search for comparable transactions between independent entities. This approach not only requires significant time and resources of specialist staff, it is also ad hoc and inherently subjective, which is the underlying cause of the increasing conflicts.
In our view it is inappropriate to seek to solve this problem by relying on the MAP, which requires further resources, while also relying on individualised solutions, essentially by bargaining between the parties involved, exacerbated by the extreme secrecy of the procedure. Weaker countries are inevitably disadvantaged by the MAP, and have in our view rightly resisted pressures to make it compulsory and binding through the introduction of what is misleadingly described as arbitration. The procedures which have been developed do not provide independent adjudication with publication of a reasoned decision which could provide guidance for similar cases. Instead, the procedure is totally secret: even the existence of a complaint is considered confidential. Furthermore, the preferred procedure is ‘baseball’ arbitration, which leaves to the arbitrators only a choice between the ‘last best offers’ of the parties, reducing the process to one of haggling over amounts.