The Axiom Groupe conference on Transfer Pricing Excellence was held in Barcelona on 19 and 20 May 2016. The conference included a workshop from the World Bank group. Some of the important issues coming out of the sessions are summarized below.

Impact of country by country reporting

The consequence of the requirement for country by country reporting by multinational groups will be greater transparency and visibility for the global value chain and the activity in individual countries. The tax authorities will be able to identify the entities based in tax havens more easily and gain an overview of their activity. This could lead to an increase in the number of tax audits requiring the use of greater resources to collect data within the business.

If the country by country information is publicly available other stakeholders such as employees and shareholders, and outside parties such as NGOs , the media and the public, will also have access to greater information about the group activities. An improvement will be required to the way groups communicate with these interested parties and a simple and clear message is required.

Delineation of the transaction

Delineation of the transaction involves looking at the real transaction and making sure this is identified. This will often depend on the allocation of risk. The contractual terms would be examined but the correct delineation of the transaction depends on looking at the actual conduct of the parties and comparing this to the contractual terms.

The tax administration would interview key management to understand the business and industry; the main processes and value drivers; and the group transaction flows and pricing. The executives within each major process would be interviewed to establish sub-processes, their objectives and the risks involved. They would aim to understand the process of decision-making, reporting, review and reward structure.

Written information could be collected on the transfer pricing model and the relevant personnel. Documents including meeting notes and emails on key projects would also be relevant. This would enable identification of any divergence between contractual terms and the actual transactions.

Substance

In the age of country by country reporting it will be more important than ever to show substance and this means ensuring that each entity has suitable people to carry out the necessary functions. This includes ensuring the right people are in place to accept and manage risk within an entity. Tax administrations will be scrutinizing the economic substance of some entities very closely.

Legal entities vs. operating structures

Transfer pricing information is needed for legal entities but non-tax staff are not concerned with the legal structure and are more interested in the information relating to the operating divisions. They focus on the figures prepared for management purposes rather than the statutory accounts. It is therefore essential for tax people to communicate their requirements to the non-tax (e.g. accounting and IT) staff and make sure that the accounting and IT systems can produce the information required for transfer pricing reporting. This will be especially important in the case of country by country reporting.

Country by country reporting may lead to an increased focus on branches by tax administrations. The tax function in a group must ensure separate reporting of branches in the group consolidation system. They need a separate income statement and balance sheet. Transactions will need to be evidenced by intercompany invoicing; and adequate intercompany agreements should be in place.

BEPS and developing countries

Transfer pricing is a major concern for developing countries. Comparable data is an issue as this may not be available and the tax administration may not be able to acquire suitable databases. Developing countries are also at a disadvantage because in many cases the judiciary is not familiar with transfer pricing issues; the legislative framework does not cover some areas; and the tax treaties are inadequate if they exist at all.

Base erosion arises from domestic or international sources. The domestic sources include ineffective tax incentives; exemptions; unfocused tax policy that targets the wrong taxpayers; and administrative challenges resulting from corruption and poor organization. Capacity constraints within the tax administration may also lead to more base erosion.

International sources of base erosion include mis-pricing of intragroup transactions; aggressive tax planning; lack of international tax policy instruments; as well as administrative challenges and capacity constraints. Developing country tax administrations often lack the relevant transfer pricing knowledge and expertise and are often working with poor quality accounts submitted by taxpayers.

Some important issues for developing countries are not covered in the report on base erosion and profit shifting (BEPS). These include illicit cash flows and non-reported transactions; base eroding tax incentives; tax treaty applications; and comparable data/access to databases. Natural resource tax needs to be considered. Domestic resource mobilization also involves capacity building to strengthen the tax administration.

Commodity transactions

The report on commodity transactions was included in BEPS to address developing country concerns over exploitation of volatile commodity prices by multinationals. Developing countries exporting commodities were concerned about the pricing data and the significant adjustments often made. As multinationals exploited the price volatility of commodities by the use of transactions through entities in low tax jurisdictions some developing countries developed a “sixth method” for transfer pricing.

BEPS says that the CUP method is usually appropriate for commodities transactions. Reasonably accurate adjustments to the CUP can be made. In pricing commodity transactions it is necessary to consider the volume of transactions; the period of the arrangements; the terms of agreements; any premia; the pricing date; supply chain information; and information compiled for non-tax purposes.

Establishing the pricing date is important owing to the price volatility of commodities. When the taxpayer does not provide reliable evidence of the pricing date agreed by the associated enterprises tax administrations may deem the pricing date for the commodity transaction on the basis of the evidence available. This may be the date of shipment as evidenced by the bill of lading or equivalent document depending on the means of transport.