The OECD has published on its website comments received on the discussion draft on the transfer pricing aspects of cross border commodity transactions. This was issued as part of the response to action 10 of the base erosion and profit shifting (BEPS) action plan.

The discussion draft dealt with issues often encountered in transfer pricing of commodity transactions, especially by developing countries. These issues include the use of pricing date conventions that allow the taxpayer to choose the most favorable quoted price; significant adjustments to the transfer price by related parties; charging large fees to the taxpayer in the developing country for transportation, packaging, distribution or marketing; or involvement in the supply chain of entities with limited functionality based in opaque low tax jurisdictions. In response to these challenges some countries have adopted their own specific measures such as the so-called “sixth method” employed in some South American countries.

To give guidance on the transfer pricing treatment in the face of these challenges the OECD proposes to amend the transfer pricing guidelines to clarify that the comparable uncontrolled price (CUP) method can be used to price commodity transactions and that the quoted or publicly available prices may be used as a benchmark to arrive at the transfer price. Additional guidance would be given on the adoption of a deemed pricing date for related party commodities transactions if there is no actual pricing date agreed by the parties. Additional guidance would also be given on comparability adjustments.

In addition to this discussion under action 10 the OECD considers that other actions taken under the BEPS plan would also help to ensure that the pricing of commodity transactions is in line with value creation. Where pricing reflects value creation this will help to protect the tax base of developing countries that are dependent on commodities.

Comments on the discussion draft were received from more than thirty commentators including trade organizations, businesses and professional firms. Commentators are in agreement that there should be an international consensus on transfer pricing methods to be used rather than single country approaches such as the use of varieties of the “sixth method”. A consensus can ensure that pricing corresponds to value creation and can reduce the risk of double taxation.

As some commentators note, commodity prices are generally based on a market reference price with a premium or discount for factors such as quality, volume or availability. The arm’s length price would therefore depend on both the market reference price and the other factors. Commentators emphasize that tax authorities should not just use the market reference price under the CUP method but must take into account the adjustments for other factors. There are reliable sources of information on these other elements, such as transactions by other related parties with independent third parties and price reporting by agents or brokers that publish premiums or discounts for transactions with particular characteristics. The premium on a transaction could therefore be analyzed into different comparability adjustments.

A problem with commodities is that different commodities have particular characteristics and prices may be quoted differently in various markets. Prices change in a short period of time and it is important to establish the timing of the controlled and comparable transactions. Standardization of the sources of information that can be used would be appropriate as a starting point and guidance on appropriate comparability adjustments would also be helpful. Although CUP would normally be the appropriate method certain commodities may require other pricing methods such as a profit method owing to their particular characteristics.

In some cases commodities may be bought and sold on long term contracts whereas in other cases the price would take into account the spot or forward rate at the time of the transaction. As in other areas of transfer pricing the contractual arrangements between the parties should be respected unless their behavior suggests that other arrangements have been applied in practice.

Documentation is seen to be a problem in view of the quantity of commodity transactions performed by large companies in a year. A practical approach would need to be taken to reduce the compliance burden. Another issue mentioned by commentators is that tax authorities should acquire more knowledge of how commodity markets operate, to avoid unnecessary questions and enquiries.

The issues raised by commentators will be considered during the public consultation to be held by the OECD on 19 and 20 March 2015 in Paris.