The document offers four alternative approaches to addressing these concerns:
- Expanding access to data sources for comparables. For example: improving the range of data contained in commercial databases; expanding developing countries’ access to these databases; and increasing the access to comparables data in those developing countries with a high number of sizeable independent companies.
- More effective use of data sources for comparables. For example: guidance on the effective use of commercial databases; the selection of foreign comparables; whether and how to make adjustments to foreign comparables to increase reliability; and alternative approaches to finding comparables.
- Approaches to reducing reliance on direct comparables. For example: guidance on using proxies for arm’s-length outcomes; the profit split method; value chain analysis and safe harbours; application of the so called “sixth method”; and a review of possible anti-avoidance approaches.
- Advance pricing agreements and mutual agreement proceedings. Including a review of developing countries experiences with pros and cons of APAs and negotiations to resolve transfer pricing disputes as well as guidance on mutual agreement proceedings.
The document concludes that, “developing countries have particular difficulty in obtaining reliable comparables data for the purposes of determining transfer prices” and suggests 15 possible actions in response. These actions include:
- Expanding access to data sources for comparables. Support could be provided by donors to fund access to commercial comparables databases;
- More effective use of data sources for comparables. Additional guidance or direct assistance could be provided to developing countries with regard to the effective use of commercial databases;
- Approaches to reducing reliance on direct comparables. For example, additional guidance from the Secretariat or direct assistance from the OECD Tax and development programme being provided to developing countries with regard to safe harbours; and
- Advance pricing agreements and mutual agreement proceedings. A review of country approaches to negotiations to resolve transfer pricing disputes and their governance frameworks could be prepared by the Secretariat.
The document notes that, given the long list of possible actions, there should be some prioritisation of those actions based on country needs and the availability of resources.
The OECD is seeking interested parties’ comments by April 11 2014.
It may be easy to overlook this document given that it is published at a time when the OECD is consulting on a large number of transfer pricing matters. However, it should not be overlooked.
One potential impact of the proposed country-by-country reporting template disclosures is that many more developing countries will have access to a much broader range of information about multinational companies’ global operations. Consequently, there is likely to be an increasing interest in identifying comparables to assess the arm’s-length nature of the pricing adopted in many developing countries. This document is a good first attempt to address the comparability issues that are likely to arise over the next few years.
The relatively limited treaty network means that many developing countries have increased the risk of double taxation (due to the lack of a MAP) arising from pricing disputes, so this guidance to companies and tax authorities alike should be welcome.
However, the risk is that the OECD is “stretched” too far and does not have sufficient resources to apply to these issues. There is also the risk that donors will not step-up with real financial assistance in what is typically a low profile area of developing country aid.
By Elizabeth Hughes of Grant Thornton UK
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