On 3 November 2014, the OECD released, as part of a series of documents pursuant to the Action Plan on BEPS, a discussion draft on Action 10 (Other high-risk transactions) regarding proposed modifications to Chapter VII of OECD Transfer Pricing Guidelines („OECD Guidelines”) relating to low value adding intra-group services.
Overview
The discussion draft proposes a new section containing additional guidance with respect to an elective, simplified transfer pricing approach for low value adding intra-group services, which will be reflected in a revised version of Chapter VII of the OECD Guidelines.
The proposed guidance is described as being intended to achieve a balance between appropriate charges for low value adding services and head office expenses and the need to protect the tax base of payor countries.
Furthermore, the discussion draft contains some clarifications with regard to the existing chapter VII. It should be noted that the views and proposals in the discussion draft do not represent a consensus view of the OECD, and were released in draft form in order to provide an opportunity for public comments.
Key features of the proposed guidance include:
- A standard definition of low value adding intra-group services;
- Clarifications of the meaning of shareholder activities and duplicative costs, specifically in the context of low value adding intra-group services;
- Determination of appropriate mark-ups for low value adding intra-group services;
- Determination of appropriate cost allocation methodologies and satisfaction of a simplified benefit test relating to low value adding services;
- A description of documentation that should be prepared by a multinational enterprise group to qualify for the simplified approach.
Implications
The discussion draft contains important guidance with respect to an elective, simplified transfer pricing approach for low value adding intra-group services, which will ultimately be reflected in a revised version of Chapter VII of the OECD Guidelines.
This simplified approach has both similarities and differences relative to the report on low value adding intra-group services issued by the EU Joint Transfer Pricing Forum and to existing regulations in certain countries.
Global businesses will want to evaluate the implications of these proposals for their intra-group service arrangements, continue to monitor developments with respect to this Action 10, and consider providing input to the OECD on the discussion draft.
