The overall declared intention is to create a new framework covering the way profits are allocated to the right tax jurisdiction and how can this be monitored. It seems that the struggle to secure corporate taxes has intensified.
However, this is taking place in an economic context in which transactions are more and more complex and have been set up with an increasing emphasis on efficiency from an operational point of view. Transactions are designed to follow a commercial objective, and it is almost never straightforward to estimate the amount of tax which should be paid in each jurisdiction based on these structures.
The OECD recognizes that taxpayers face real difficulties in seeking comparable information. On the one hand, it can prove expensive to obtain financial data of any sort, and on the other hand, it is hard to put your finger on a transaction which may be comparable with yours. The reason is that each group has its own commercial strategy and this has been reflected for years in the split or mix of functions and risks between the companies of the group. It is rare that two business models are genuinely similar. It is even rarer for business models to be simple.
There has been a lot of discussion about Base Erosion Profit Shifting too. How often can a complex transaction result in the erosion of the taxable base in one country? I would put the question the other way round: How can you say that a complex financial transaction has a value of 10 or 20? Functions and risks are mixed in a group to secure commercial efficiency. This results in a lack of scientific tools to identify what is a reasonable remuneration. We would need to go back to splitting each individual function, which could show an indication of the price, but this is not commercially efficient.
At the same time, almost 50% of OECD countries ask for contemporaneous documentation. This means that group companies’ management are required each year to consider transfer pricing policy, analyze it, and document it. The process often ends with a transfer pricing adjustment made voluntarily in the annual corporate tax return, in the category of “other items similar to revenues.” A client from an OECD country said recently “if we want to keep that country happy, we make a voluntary transfer pricing adjustment in the corporate tax return.” How can we make tax jurisdictions happy, if we do not start by keeping up to date transfer pricing documentation?