A discussion draft was released by the OECD on 19 December 2014 setting out revisions to the OECD transfer pricing guidelines as a result of actions 8, 9 and 10 of the action plan on base erosion and profit shifting. These actions are quite closely related to each other and all involve potential amendments to the OECD transfer pricing guidelines.

One of the proposed actions is the formulation of rules that would prevent base erosion by the transfer of risks or allocation of excessive capital among group members. The action therefore looks at the possibility of amending transfer pricing provisions or taking other measures to prevent excessive profits being earned by an entity just because it has taken on certain risks or has provided capital. The result of the amended rules would be to ensure that the returns earned by an entity correspond to the value created.

The actions also require measures to stop entities carrying out transactions that would rarely or never occur between unrelated third parties. This would involve adding further detail in the transfer pricing guidelines about the situations when the tax administration can re-characterize transactions.

A further measure covered by the action plan involves the introduction of transfer pricing provisions or other measures that would ensure that base erosion does not occur through the transfer of intangible assets that are difficult to value, for example because they are unique intangibles and no sufficiently comparable transactions can be found.

The first section of the discussion draft includes suggested amendments to Chapter 1 of the transfer pricing guidelines in section D on guidance on applying the arm’s length principle. This emphasizes that the transaction that has taken place must be accurately defined, and guidance is given on the allocation of risk, identifying the economic characteristics of the related party transaction and situations in which the tax administration may re-characterize or disregard transactions.

In the second part of the discussion draft various options are given for the types of special measures that could be taken in relation to intangibles, risk and over-capitalization. The discussion draft sets out the issues on which input is invited from interested parties and that can be considered when assessing the various options.

Comments from interested parties on the discussion draft are invited by 6 February 2015. There will be a public consultation meeting on these issues on 19 and 20 March 2015.