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BEPS Action 10 feedback shows cost pool remains a contentious issue

Public comments on BEPS Action 10 welcome the OECD’s simplified approach to dealing with low value-adding intra-group services and generally support the proposed profit mark-up range. However, feedback has stressed the need for clarification over more valuable services and single cost pool allocation has been deemed impractical.

The BEPS Monitoring Group stressed that “there should be a fundamental re-evaluation of the OECD approach to transfer pricing, and not just a patch-up of the current rules. The wide variety of available methods, and the need for detailed “facts and circumstances” analysis, have created a system which is difficult to administer and leaves considerable scope for subjective judgment.”

Simplification welcomed but not without risks


From public comments, it seems that there is consensus that simplification is the right approach when dealing with low value-adding intra-group services.

“We support the recognition by the OECD, that there must be a balance between simplifying the deduction of legitimate management and head office expenses, that should be charged to affiliated companies under the arm’s-length principle, and addressing the concerns of certain tax administrations and other Stakeholders, that such recharges could potentially be used by multinational enterprises to artificially reduce taxable profits in the payor country,” said Will Morris, chairman of the BIAC Tax and Fiscal Affairs Committee.

Simplification is expected to reduce the burden of both taxpayers and tax administrations with regards to routine low value-adding intra-group transactions and help reduce multilateral disputes with tax administrations.

“However, for the benefits of a simplified approach to unfold, a uniform adoption and implementation of the provisions provided within the Discussion Draft on a global level is key,” stressed the comments from BDI.

Profit mark-ups

The discussion draft establishes a range of 2% to 5% in order to determine the arm’s-length charge for low-value adding intra-group services. The draft mentions that the same mark-up must be applied for all low-value adding services irrespective of service categories. No further functional and economic analysis is required.

“There is a concern about how an MNE should interpret the range established by the OECD. The discussion draft does not mention if the range should be considered as a safe harbour rule or not. A failure to further clarify this topic may lead to disputes between tax administrations in the respective service provider and service recipient locations,” said the Siemens commentary.

There is a risk that tax administrations in locations where services are provided will assume the upper limit proposed while the tax administration of the payor country will assume the opposite. The difference in interpretation by the two countries could be drastically different in the case of developing countries versus developed countries and European versus non-European countries.

“However, businesses quite often are faced with tax administrations of certain countries from which intra-group services typically are provided which argue for unrealistically high profit mark-ups to be applied. With regard to this situation the suggested approach would be rather helpful, whether a range or a fixed mark-up percentage is agreed upon,” said BDI.

Clarification needed on valuable intra-group services

While the feedback welcomes the simplified approach for determining the arm’s-length charges and documentation for low value-adding intra-group services, numerous comments have stressed that the same approach should be applied to more valuable intra-group services.

BASF strongly recommends to apply the same proposed simplified approach (including simplified benefit test), that focuses on creating transparency on the service charging rather than on proving benefits for single charges, for all intra-group services – covering both, low value-adding and non-low value-adding services.”

Morris reiterated BASF’s comments, highlighting the need for further guidance on more valuable intra-group services.

“Although we agree in principle that a separate regime for lower value services could be an effective practical solution for certain services, we are concerned that the Discussion Draft does not substantially add guidance on the other, more valuable services...Such high value-adding services have been identified as a BEPS concern by many governments, and are the cause of many disputes between MNEs and tax administrations. We believe that it would be helpful if more specific guidance on these services could be included in the transfer pricing guidelines.”


Unfeasible cost pool


Paragraphs 7.52 and 7.53 of section D of the discussion draft outline the recommended approach for the determination of the cost pool. Reed Elsevier considered the approach to be “overly prescriptive”.

Quantera Global said: “This paragraph [7.52] seems to suggest that an MNE that elects for the simplified approach should - as an initial step - create one global cost pool for all costs incurred by all members of the group in performing any low value-adding intra-group services. This suggests an “all or nothing” approach that does not allow for a pooling of only certain categories of qualifying services or pooling between a selection of group companies.”

The approach starts by creating a pool of costs of all low value-adding intra-group services for the MNE group and then removes costs to services provided by one group member, solely to another group member, to arrive at the pool of costs to be allocated. The guidelines require a single calculation for the MNE covering all of its low value-adding services.

“This approach is not workable on a practical level for a number of reasons. Firstly, Reed Elsevier is comprised of 5 separate divisions and there are intra-group services that are specific to each separate division. Secondly, recharges solely between two entities are currently not included. Thirdly, intra-group services within Reed Elsevier are usually calculated and recharged separately for each specific category of services and a different individual may be responsible for the recharge calculation for each service,” said Paul Morton of Reed Elsevier.

“For these reasons, to create a single cost pool of all low value-adding intra-group services for Reed Elsevier as a whole would require significant changes to our existing processes and create a significant burden centrally in terms of collating the data from a wide number of sources within the business for no discernible benefit.”

BIAC, Rödl & Partner, Swiss Holdings, True Partners Consulting and USCIB all stressed that robust guidelines on the cost pool were sufficiently lacking in the draft.

Future focus

While feedback on Action 7 has been positive in certain areas, it is clear the OECD will need to clarify its position on higher value-adding services and flesh out its guidelines regarding cost pools.

Cost pool allocation is without a doubt the most contentious issue.

The OECD will have to work hard to reassure multinationals that its approach can work effectively across multiple intercompany divisions.

The BEPS Monitoring Group stressed: “As all countries around the world now begin to implement these rules with more rigorous audits, they are therefore likely to lead to greater uncertainty and conflicts. At the same time, they impose significant strains on especially the poorer countries, which can ill afford to waste scarce human resources operating a dysfunctional system.”

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