Dr. Kai-Uwe Bandtel

Phone: +49 (89) 92 87 80 - 560
Fax: +49 (89) 92 87 80 - 860

In November and December 2014 the OECD published various discussion drafts relating to BEPS (”Base Erosion and Profit Shifting”) Action 10. In early 2015 the OECD gave the opportunity to interested parties to submit their comments on the Discussion Drafts. Subsequently, public consultations in the subject matters were held in Paris in March 2015. On the 5th of October 2015 the OECD released the remaining Final Reports on the 15 Actions against BEPS. Before releasing the report, intensive discussions between the 62 participating states and the various international organizations took place. The results are workable recommendations and not solely mere declarations of intent. The Actions 8-10 especially include adjustments of the OECD Transfer Pricing Guidelines, whereby the Action 10 deals with details of Low Value-adding Intra-group Services, Commodity Transactions as well as the scope of work for guidance on the Transactional Profit Split Method. Basically the Actions should not be considered separately, but in fact in the entirety caused by the close link between the Actions.
Low Value-adding Intra-group Services
This chapter of the Report provides new guidance on a simplified approach for Low Value-adding Intra-group Services (Section D) and besides them changes to some paragraphs of Chapter VII of the OECD Transfer Pricing Guidelines (Section A to C). Section D on Low Value-adding Intra-group Services specifies the balance between allocating charges for intra-group services in accordance with the arm´s length principle and the need to protect the tax base in the residence state of the service recipient. Marlies de Ruiter, Head of the Tax Treaty, Transfer Pricing and Financial Transactions Division, stresses in the BEPS Webcast #8 (Launch of the 2015 Final Reports) that one aim of the approach is transparency. The approach gives the specification that the mark-up for Low Value-adding Intra-group Services should be equal to 5% in contrast to the discussion draft of November 2014 where the OECD still claimed that the mark-up should be no less than 2% and no higher than 5%. Furthermore, the OECD states in the Final Report that the mark-up under the simplified approach does not need to be benchmarked or justified with a study. For implementation the participating countries in the BEPS program have agreed on a two-step approach. First, a large group of countries enabling this elective mechanism by approving its applicability in their countries before 2018. In a second step further analysis of the design and other issues of the implementation has to be done in order to achieve even more widespread adoption of the simplified approach. This step shall be finalised before the end of 2016 and allow additional countries to join the aforementioned group.
Commodity Transactions
Action 10 covers additional guidance to Chapter II of the OECD Transfer Pricing Guidelines and hereafter especially applicable to commodity transactions. The new guidance states that the Comparable Uncontrolled Price Method (CUP) is normally an appropriate transfer pricing method for commodity transactions between associate companies. The Report clarifies that the quoted prices obtained in public international or domestic markets can be used under the CUP method as a reference for the arm´s length price.
Moreover, the OECD alludes that a quoted price in this context also includes prices obtained from admitted and transparent price reporting or statistical agencies. In the case where there are differences between the conditions of the controlled and the uncontrolled transactions and where economically needed, pricing adjustments shall be performed. For documentation purposes especially with regard to Action 13 the taxpayer shall prepare a written document and include the price-setting policy of commodity transactions. Furthermore, a relevant factor for commodity transactions referred to the OECD Report is the pricing data or time period. Where the taxpayer can interfere reliable evidence of the pricing date agreed by the associated companies (e.g. contracts, proposals) and this is consistent with the actual conduct, tax administrations shall accept the price for the commodity transaction by reference to the pricing date. If the pricing date is inconsistent with the actual conduct, if there is no pricing date available or if the taxpayer does not provide reliable evidence of the pricing date, the tax administrations may consider the date of shipment or other equivalent document as substantiated. The work on this chapter is not finished yet. Further work mandated by the G20 Development Working Group are forthcoming.
Transactional Profit Split  

Action 10 underlines the importance of the clarification in application of the Transactional Profit Split Method in the context of global value chains. However, as the Report does not give final consultation in questions which have raised from the Discussion Draft in December 2014 concerning the Transactional Profit Split Method, further work still has to be undertaken. The scope of work contains the following topics:

  • Most appropriate method (circumstances when the Transactional Profit Split Method is the most appropriate method)
  • Highly integrated business operations
  • Unique and valuable contributions
  • Synergistic benefits
  • Profit splitting factors
  • Use of profit split to determine the TNMM range, royalty rates and other payment forms.

Referring to the published Action 10, the Report should be the basis for the draft guidance which will be developed in 2016. It is expected that the aforementioned points will be finalised in the first half of 2017 and have to take into account the conclusions of the Report to BEPS Action 1 ”Addressing the tax Challenges of the Digital Economy”.