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OECD Issues Profit-Split Method and Commodity Transactions Drafts

Dec 17, 2014

Tax Analysts news analysis by David D. Stewart discusses the December 16 release of two discussion drafts under action 10 of the OECD’s base erosion and profit-shifting (BEPS) project on potential guidance on the use of transactional profit-split methods and the pricing of commodity transactions.

The draft on transactional profit-split methods doesn't make recommendations, but instead seeks comments on fact patterns in which a transactional profit-split method may be appropriate.

Guy Sanschagrin of WTP Advisors views the draft as the continuation of a trend toward greater reliance on profit-split methods. He noted that profit splits are related to the push for pricing location advantage savings.

"The concern is that this might lend itself to a formulary apportionment-type approach," Sanschagrin said.

Sanschagrin hopes the OECD is able to avoid establishing an automatic approach that results in a formulary-apportionment-type outcome, while at the same time encouraging taxpayers and tax authorities "to take on a more robust approach to transfer pricing" that takes into account the taxpayer's facts and circumstances.

Sanschagrin also commented on the OECD’s Commodity Transactions Draft which sets forth proposals meant to address issues important to commodity-dependent countries including adjustments made to quoted prices, pricing date conventions, and accounting for the participation of other parties in the supply chain.

This draft clarifies that the term "commodities" refers to physical products for which a quoted price is used by independent parties to set prices, and reaffirms that the comparable uncontrolled price method is generally the most appropriate transfer pricing method for commodity transactions for which there is a quoted or public price.

Sanschagrin said that some assume that when using the comparable uncontrolled transaction method, there is equivalence between related- and unrelated-party transactions, however, there may be differences in functions and risks associated with the two types of transactions.

“Adjustments to the quoted price must be made to account for the specific functions and risks in intercompany transactions. For example, a multinational company may want to centralize risk for business reasons. That risk will be different for a company dealing with unrelated third parties versus one managing an integrated global supply chain,” said Sanschagrin.

Sanschagrin expressed concern that use of the deemed pricing date could create more risk and become an additional source of controversy. The proposal suggests that disputes involving the use of a deemed pricing date be handled through the mutual agreement process.

Comments on the discussion drafts are due February 6, and a public consultation will be held on March 19 and 20.

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