IMGCAP(1)][IMGCAP(2)]Transfer pricing documentation rules have come to the fore with the United Kingdom’s Brexit.
The European Union and the Organization for Economic Cooperation and Development appear to apply similar transfer pricing documentation rules to multinational companies, but differences nevertheless abound. Some multinational enterprises may view these differences as nuances, but they can be significant.
Both the transfer pricing documentation policy and pricing procedures can differ under the two sets of rules. Brexit, coupled with the Internal Revenue Service’s lethargy in formally adopting Action 13 in the OECD’s Base Erosion and Profit Shifting (BEPS) action plan exacerbate these transfer pricing documentation differences. Consider eight of the most salient facets of the EU and OECD documentation rules:
1. public policy differences;
2. “domestic market” approach;
3. documentation complexities;
4. optionality;
5. coordinated procedures;
6. Masterfile;
7. local country-specific documentation file;
8. country-by-country report.
The EU developed its transfer pricing documentation procedures from 2001 to 2006. Countries were then seeking EU membership and struggling to meet EU admission requirements; no country then sought to leave the EU. The EU recognized that during that time period, member countries had sharp transfer pricing documentation differences. Western European countries had much more transfer pricing experience than had Eastern European post-Communist systems seeking EU membership.
Domestic Market Approach
The EU treats its market as being analogous to a domestic market. In contrast, the OECD rejects this domestic market approach for its members. The EU, when initially constituted, guaranteed a market without frontiers, providing free movement of goods, persons, services and capital.
Tension existed during earlier EU years concerning the free movement of goods and services. In later times, tensions arose within the EU concerning capital movements and then to persons, especially to persons not originally from the EU.
Documentation Complexities
The EU recognized the transfer pricing documentation procedure is a relatively new international tax concept. The EU sought to “tease” the benefits of having documentation standardization for both tax administrations and multinational enterprises. Companies had complained that country documentation obligations were both divergent and onerous. The EU portrayed cross-border documentation standards as being a salutary answer. The EU advocated having cross-border documentation standards as a positive approach to tax administrations that has limited transfer pricing experience.
The OECD, in developing its own transfer pricing documentation rules, began with the EU transfer pricing rules. The OECD substantially modified these transfer pricing documentation rules. The OECD reflects its transfer pricing documentation rules through BEPS Action 13. Tax administrations and multinational enterprises gathered their experiences and added more detailed rules than in the past.
Optionality
The EU rules enable the tax administration of a particular member country to accept all or part of the EU transfer pricing documentation rules. The EU rules give each country’s tax administration the option to comply with these EU transfer pricing rules, or to develop transfer pricing document rules of its own.
In contrast, the OECD requires all member tax jurisdictions to enforce these transfer pricing document rules.
The EU rules give the multinational enterprise the option of complying with the uniform EU transfer pricing document rules or to reject these document rules and try to follow each country’s separate transfer documentation rules. In contrast, the OECD requires all multinational enterprises to meet these transfer pricing document rules.
Masterfile
The EU provides suggestions, but not mandates, to tax administrations and multinational enterprises as part of its Masterfile process. The multinational enterprise can provide nine specific suggested items to the EU’s Masterfile:
• general business description;
• organizational and operational business structure;
• identification of associated enterprises;
• general description of controlled transactions;
• functional analysis;
• intangible and royalty ownership;
• the company’s transfer pricing policy;
• cost-sharing arrangements;
• supplementary information.
In contrast to the EU rules, the OECD specifically obligates a multinational enterprise to comply with the OECD Masterfile provisions. The OECD transfer pricing documentation rules contain more detail than does the EU transfer pricing documentation rules. The OECD Masterfile rules specifically address the organizational structure of the multinational enterprise, descriptions of the multinational businesses, intangibles, financial activities, and financial and tax positions.
In general, it is sufficient for an enterprise that completes the OECD transfer pricing Masterfile to also use the Masterfile for EU purposes. In contrast, however, it is not sufficient for an enterprise to use the EU Masterfile for OECD purposes. The OECD Masterfile requires an enterprise to provide significantly more information than the EU Masterfile contains. The aforementioned differences do not apply the cost-sharing arrangement provisions in the EU Masterfile, as the OECD Masterfile does not mandate information concerning cost-sharing arrangements.
Local Country-Specific Documentation File
The EU, through its country-specific documentation rules, and the OECD, through its local file rules, are broadly similar in concept, but the OECD provisions require more specific detail and focus more heavily on local entry financial information. A multinational enterprise that prepares the OECD local file can use these documents to meet EU country-specific documentation. The multinational enterprise would be unable use the EU’s country-specific documents to meet OECD local country specific rules.
The EU asks the multinational enterprise to reflect six types of local transactions:
• detailed description of the local business;
• country-specific controlled transactions;
• comparability analysis;
• transfer pricing specifics;
• internal or external comparables;
• transfer pricing policy applications.
The OECD local file provisions specifically address three specific documentation provisions:
• local entity provisions, including business activities, management structure, business strategy and key competitors;
• controlled transactions, including intra-group payments, intercompany agreements, and transfer pricing method selection, assumptions, and comparability analysis;
• financial information, including local entity financial accounts, allocation schedules, and relevant financial data comparables.
Country-by-Country Report
The EU provides no parallel to the OECD country-by-country provisions, and contains no country-by-country report. The OECD requires multinational enterprises to report country-by-country documentation meeting the consolidated 750 million Euro gross revenue threshold.
The OECD developed a model template for the Country-by-Country Report that provides an overview of the allocation of income, taxes and business activities by tax jurisdiction, and then lists all the constituent entities with the multinational group. The OECD requires an enterprise to list, by tax jurisdiction, the revenues, profits, income taxes, stated capital, accumulated earnings, the number of employees and non-cash assets.
Multinational companies and their accountants and tax professionals will have plenty of work to do to comply with the ever-changing rules.
Robert Feinschreiber and Margaret Kent are attorneys and counselors with
