Effective safe harbours can eliminate a material portion of the cost and time in complying with or enforcing the rules that would otherwise govern the controlled transaction. That way, tax administrations and businesses can re-direct their efforts to more significant and important issues.
Almost 20 years ago, the Organisation for Economic Co-operation and Development (OECD) put forward safe harbour guidelines for adoption by Member States. The OECD recently acknowledged that this previous guidance had ‘a somewhat negative tone’ regarding transfer pricing safe harbours. The tone did not accurately reflect the practice of OECD Member States, many of which have adopted transfer pricing safe harbour provisions.
The previous guidance also was largely silent about the possibility of establishing a safe harbour through a bilateral agreement, even though some countries have favourable experience with such agreements.
Given the importance of safe harbours in reducing compliance and administrative burdens for businesses and tax authorities, the OECD has taken several steps. On 21 May 2013, an OECD release reported that the OECD Council approved a revision concerning safe harbours contained in the OECD Transfer Pricing Guidelines.
Specifically, the revision of Section E on safe harbours within Chapter IV of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations included new guidance that:
- Gives countries opportunities to ease compliance burdens and offer greater certainty for situations involving smaller taxpayers or less complex transactions.
- Provides a basis for countries – especially developing countries – to design a transfer pricing compliance environment that makes optimal use of limited resources.
- Provides sample agreements to facilitate negotiations between tax administrations for competent authorities to establish bilateral safe harbours for certain classes of transfer pricing cases.
On a similar note, on 15 March 2013, the US Internal Revenue Service (IRS) opened consultations on bilateral safe harbours with regard to arm’s length compensation for routine distribution functions. Such functions are frequently an issue in transfer pricing cases.
KPMG’s Global Transfer Pricing Services (GTPS) practice welcomes this new guidance and contributed to the OECD’s requests for comments on an earlier version of the latest proposals. Separately, but connected, KPMG’s GTPS practice also contributed to the US IRS’ request for comments on the same topic.
Our submission to the OECD emphasised that safe harbours should always be elective on the part of the taxpayer. If not, the taxpayer could be at risk of double taxation.
Further, unilateral safe harbours only protect taxpayers from adjustments by one of the two or more tax authorities with an interest in a transfer pricing transaction. In KPMG’s experience, many tax authorities simply do not respect or give any weight to safe harbours offered by other tax authorities.
Definition of safe harbour
A safe harbour in a transfer pricing regime is a provision that applies to a defined category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a country’s general transfer pricing rules. A safe harbour substitutes simpler obligations for those under the general transfer pricing regime. Such a provision could, for example, allow taxpayers to establish transfer prices in a specific way, e.g. by applying a simplified transfer pricing approach provided by the tax administration. Alternatively, a safe harbour could exempt a defined category of taxpayers or transactions from the application of all or part of the general transfer pricing rules. Often, eligible taxpayers complying with the safe harbour provision will be relieved from burdensome compliance obligations, including some or all associated transfer pricing documentation requirements.