us internal revenue service: apa training oecd guidelines

8/14/2019 US Internal Revenue Service: apa training oecd guidelines

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OECD TRANSFER PRICING

GUIDELINES FORMULTINATIONAL ENTERPRISES

AND TAX ADMINISTRATIONS

STEVEN A. MUSHER

DEPUTY ASSOCIATE CHIEF COUNSEL

(INTERNATIONAL-TECHNICAL)August 14, 2001


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OECD WHERE TRANSFER

PRICING FITS IN

SECRETARIAT

Jeffrey Owens

John Neighbour

BUSINESS

INDUSTRY

ADVISORY COMMITTEE

BIAC

WP1

OECD

MODEL

CONVENTION

STEERINGGROUP

WP6

MULTINATIONAL

ENTERPRISES

WP8

EXCHANGE

OF

INFORMATION

COMMITTEE

ON FISCAL

AFFAIRSCFA

OECD

THIRTYMAJOR TRADING

PARTNERS


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MNEs AND GLOBAL ECONOMY

Greater portion ofworld economyhoused withinMNEs.

Problem of dividingtax jurisdiction overinternal value-addedwithin MNE, beforerealization in 3dparty transactions.


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MNEs AND GLOBAL ECONOMY

Decades oldcommitment toresolve on the basisof the arms lengthprinciple.

Art. 9 in virtually allof our 53 income taxtreaties, and otherOECD bilateralincome tax treaties.


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INTERNATIONAL CONSENSUS

OECD TransferPricing Guidelines

are a watershed.

Adopt arms lengthprinciple (Par. 1.13

1.14).

Reject formulary

apportionment (Par.

3.74).


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ROLE OF TP GUIDELINES

Resolution of Art. 9cases in CA(Preface Par. 17;Treasury PressRelease, 7/28/95).

Domestic law model

ALP guidance. T/P responsibility to

document ALP.


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GUIDANCE ON APPLICATION OF ALP

Functional analysis andcomparability (Par. 1.15 etseq.)

Property or servicestransferred

Functions, assets, risks

Contractual terms Economic circumstances

Business strategies


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GUIDANCE ON APPLICATION OF ALP

Selection of TPM

Best estimation ofan arms length

price (Par. 1.69). Traditionaltransaction methods

CUP, RP, CP Preferable if quality

data (Par. 2.49).


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SELECTION OF TPM

Transactional profitmethods P/S and

TNMM, last resort

If traditional methodcannot be reliably

applied alone/at all

Or, by agreement

See Pars. 3.50-51


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SELECTION OF TPM

Methods notdescribed

Provided satisfy ALP

See Par. 1.68


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ARMS LENGTH RANGE

Transfer pricing notan exact science

ALR, relatively equal

reliable values Inside ALR, noadjustment

Outside ALR, adjustto most appropriatepoint (Pars. 1.45-48)


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RECOGNITION OF TRANSACTIONS

CONDUCT MUSTCONFORM TO

TERMS

DEDUCEUNWRITTEN

TERMS BASED ON

CONDUCT ANDECONOMIC

PRINCIPLES


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RECOGNITION OF TRANSACTIONS

Recognize actualtransactions, unless

Substance different

than form Tax administration

impeded and not

arms length overall

Pars. 1.28-29, 1.37


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GUIDANCE ON INTANGIBLE PROPERTY

Trade or marketing

Bundling or

packaging with

other items (Pars.1.42-43, 6.17-18)

Cost and value, no

necessary link (Par.

6.27)


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ALP where value is

highly uncertain

(compare CWI)

Projections, priceadjustment clauses,

renegotiation

Pars. 6.28-35


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Marketing services

vs. intangible owner

Who bears expense

Extraordinarymarketing expenses

may justify return

Product quality role

Pars. 6.36-39


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INTRA-GROUP SERVICES

Independent

enterprise willing to

pay for, or perform

for itself (comparebenefit test) Par. 7.6

Shareholder activity

not justify charge Direct charge vs.

allocation


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INTRA-GROUP SERVICES

Cost vs. markup

ALP not always

profit Par. 7.33

Practical reasons oftax administration

may allow allocation

of cost of services inappropriate cases

Par. 7.37


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COST CONTRIBUTION ARRANGEMENTS

Sharing costs/risksof acquiring assets,services, rights

ALP - consistency ofcontribution shareand expectedbenefits share

Participant mustreasonably expectto benefit

Pars. 8.3-12


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Contribution value cost vs. market (Par.8.15)

Allocation keys (Par.8.19)

Balancing and buy-

in payments, notroyalty unless onlyright to use (Pars.8.23, 8.33)


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Adjustmentsnormally tobalancing payments(Par. 8.27)

Disregard, e.g., ifnot reasonable toexpect benefit

Or, if over timecontribution andbenefit sharesdiverge (Pars. 8.29-30)


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GUIDANCE ON T/P COMPLIANCE WITH ALP

Reasonable t/p efforts,

contemporaneously, to

determine if pricing in

accord with ALP Documentation of

Info, factors, method

on which pricing is

based


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DOCUMENTATION

Including relevant info

from foreign affiliates

Tax authority may

obtain to verify ALPcompliance

Prudent business

management

principles (Pars. 5.3 et

seq.)


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GUIDANCE ON PENALTIES

Overall tax

compliance system

Not give incentive to

overstate income T/P reasonable

effort to comply with

ALP should mitigate

Par. 4.18 et seq.


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GUIDANCE ON APAs Advance

determination, e.g.,of method,comparables,

adjustments, criticalassumptions (Par.4.124)

Reliability of APApredictions, TPM vs.results (Par. 4.125)


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GUIDANCE ON APAs Bilateral APAs

preferred overunilateral APAs

(Pars. 4.131, 4.163)

Guidelines for

Mutual Agreement

Procedure (MAP)APAs - Annex


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MONITORING Transactional profit

methods concerns

Monitor applicationof TP Guidelines toclarify and updatethem, as necessary

Business communityinput

Par. 3.55, Annex


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ATTRIBUTION OF PROFITS TO PEs

Working hypothesis

HO and PEs of

single enterprise

hypothesized asassociated

enterprises

Apply Art. 9 TPGuidelines by

analogy to Art. 7


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ATTRIBUTION OF PROFITS TO PEs

Testing the WH

Banking (Part II),

attribution of capital,

risk weighting, Basle Global trading

Insurance

E-tailing, TAG

Discussion drafts

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