On 19 January 2021 the Platform for Collaboration on Tax (PCT) published the “Practical Toolkit to Support the Successful Implementation by Developing Countries of Effective Transfer Pricing Documentation Requirements”.
The PCT was set up by the OECD, IMF, World Bank and UN to increase cooperation and facilitate consultations on designing and implementing international tax standards. The PCT aims to strengthen capacity building support; assist in developing joint guidance on tax issues; and improve information sharing. The PCT also helps to formulate tax technical advice to developing countries to assist them in pursuing the Sustainable Development Goals.
The activities of the PCT give support to developing countries in implementing good practices in international taxation. Toolkits have previously been issued in relation to the taxation of offshore indirect transfers on addressing difficulties in accessing transfer pricing comparable data.
As a result of the OECD/G20 BEPS project and the resulting report on transfer pricing documentation a standardised approach to documentation was recommended consisting of a master file, local file and country by country (CbC) report. The PCT toolkit considers that these standard reports are all potentially helpful for developing countries and looks at issues arising for countries that implement the reports.
By implementing the documentation requirements the tax administration can more easily analyse transfer pricing, ensure compliance with the rules and identify high risk taxpayers. This can enable them to save compliance costs by focusing their resources on those high risk taxpayers. However, the correct balance must be found between the needs of the tax administration and avoiding unnecessary compliance costs for the taxpayer.
The toolkit notes that consistency of approach between countries allows taxpayers to file their documentation in the same format in each country and therefore reduce compliance costs that would otherwise arise from the need to balance the different rules in different countries.
Countries that join the Inclusive Framework on BEPS are committed to implementing the BEPS minimum standards including the standard on CbC reporting. The Inclusive Framework conducts peer reviews to assess the implementation of the BEPS minimum standards.
The toolkit notes that Information received from CbC reports can be very valuable for developing countries but the mechanisms for accessing CbC reports in relation to subsidiaries and permanent establishments of foreign multinationals may be difficult for developing countries to implement with the resources available. The toolkit therefore suggests that appropriate international exchange mechanisms should be given priority with the assistance of regional and international organisations. By monitoring the effectiveness of CbC reporting, developing countries and regional organisations can provide input for future reviews of the BEPS minimum standards.
The toolkit also includes an examination of other approaches to transfer pricing documentation including the information and schedules to be sent in with the tax return and transfer pricing questionnaires. Targeted questionnaires can be used as part of risk assessment of a specific taxpayer, such as a particular industry, or as part of a general compliance program targeting specific groups of taxpayers and focussing on particular areas of risk such as financing or restructurings.
