On 10 February 2015 the OECD published comments received in respect of the discussion draft on changes to the OECD guidelines and other special measures that could be taken in respect of transfer pricing issues raised by actions 8, 9 and 10 of the OECD/ G20 action plan on base erosion and profit shifting (BEPS).

The discussion draft on revisions to the transfer pricing guidelines for actions 8, 9 and 10 of the OECD /G20 action plan on base erosion and profit shifting was published on 19 December 2014. This discussion draft set out proposed revisions to the OECD transfer pricing guidelines and also set out special measures that could be recommended to deal with issues involving intangibles, risk and over-capitalization.

The draft discussed amendments to prevent entities earning excessive profits merely because they take on extra risk or provided capital. The profits that an entity earns would be required to correspond to value created. Entities would also be prevented from carrying out transactions that rarely or never occur between independent parties, for example permitting tax administrations to ignore or recharacterize transactions in a wider range of circumstances. The draft also looked at measures to prevent base erosion through the transfer of intangible assets and measures to deal with unique intangibles that are difficult to value. Comments were invited from interested parties by 6 February 2015 and these comments have now been published on the OECD website.

More than 80 responses were received to the discussion draft from business, professional firms and trade organizations. A theme of some of the responses was that the suggested amendments to the OECD transfer pricing guidelines would be moving away from the practical realities of business and into economic theory. The discussion of risk in the draft amendments to the guidelines introduces the concept of moral hazard, where a party assumes risk without the safeguards to manage the behavior of the party creating its risk exposure, but this assumption that there is significant value in the management of risk is not borne out by business reality where this is generally given a routine return. Some commentators make the point that there is a trade-off between risk and return based on settled economic principles that should be respected if the arm’s length principle is to be maintained.

There may be too much attention given to how the related parties are allocating the risk. If the risk is priced according to accepted principles and in the normal way that the markets price risk then the arms length principle is being respected and there is no need for further analysis of how the risk is allocated between the parties.

Although the discussion draft refers to transactions that are undertaken only in order to shift risk, this does not correspond to the reality of business transactions. In reality no transaction is undertaken purely to shift risk because there are always obligations and promises in relation to flows of cash and there is always uncertainty as to the outcome of the transactions. Transactions that have economic substance and involve the transfer of value and risk and changes in expected cash flows should be respected if they are priced correctly. Attempts to limit transactions on certain parts of the risk/expected return curve would be contrary to the arm’s length principle.

With regard to the discussion of recharacterization of transactions the commentators consider that more weight should be given to written agreements between related parties. The terms of written agreements should only be disregarded if the behavior of the parties makes it impossible for those terms to be respected.

At least one commentator made the point that the transfer pricing issues under the action plan should be resolved by changes to the OECD guidelines and there may not be any need for further special measures. The OECD should at first wait to see the effect of amending the guidelines before considering further special measures.

The OECD is to hold a public conference on transfer pricing issues under BEPS on 19 and 20 March 2015. The discussions will focus on the recent discussion drafts on transfer pricing issues and the comments received by interested parties. Speakers at the conference will be chosen from the parties who have submitted written comments.