On 21-22 September 2009, the OECD held a major conference “Transfer Pricing and Treaties in a Changing World”. Almost 700 transfer pricing and treaty experts from over 90 governments (OECD and non-OECD), the private sector, NGOs, academia and international organisations gathered in Paris for the event. This conference was part of the OECD’s Global Forum on Tax Treaties and Transfer Pricing, which plays an important role in the OECD Committee on Fiscal Affairs’ programme to bring together international tax experts from OECD and non-OECD countries to discuss international tax issues. The Conference was open to participants from the private sector and universities for the second consecutive year, and to representatives from NGOs and news media.
Participants in last year’s Conference on the 50th Anniversary of the OECD Model Tax Convention overwhelmingly voted the adoption of the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995 as the most important tax treaty development (besides the Model Tax Convention itself) of the past 50 years. Accordingly, this year’s conference had a strong focus on transfer pricing, although a number of related treaty topics were also discussed.
In his opening address, Jeffrey Owens, Director of the OECD Centre for Tax Policy and Administration, stressed the significance of transfer pricing for as well as non-OECD economies in a global economy where multinational enterprises play a prominent role. This is especially relevant in the midst of the current economic challenges, when the location of profits and losses within a multinational group is very sensitive as it directly affects the group’s effective tax rate. Governments also are carefully monitoring the allocation of profits and losses to their jurisdictions, in a context where many of them are striving for a balance between business friendly, pro-growth tax measures and measures to maintain the needed level of tax revenues to support public spending.
These considerations, which are high in the mind of governments and private sector representatives engaged in the OECD work on transfer pricing, were reflected in the Conference programme, which addressed the following topics in a mix of presentations and case studies:
• Adjustments and Corresponding Adjustments: The Role of Articles 7, 9 and 25 of the Model Tax Convention: Panellists from the OECD Secretariat, from governments and from the private sector discussed the treaty limitations related to possible adjustments by a tax administration to the profits of an affiliate or of a branch of a foreign company and examined the extent to which the State of residence of the foreign company is obliged to make a corresponding downward adjustment to eliminate economic or juridical double taxation.
• Information Powers and Transfer Pricing: Documentation Requirements, Exchange of Information and Burden of Proof Issues: Government and private sector representatives discussed the implementation of transfer pricing documentation requirements and the use of exchange of information clauses in transfer pricing audits, as well as related burden of proof and penalty issues, trying to find the right balance between, on the one hand, enabling effective enforcement of transfer pricing legislation by tax authorities and, on the other hand, keeping the compliance burden reasonable and providing reasonable certainty to taxpayers who make documentation efforts.
• Deductibility of Interest in Related Party Situations: Panellists from the government and private sectors discussed the treaty aspects of recent changes to thin capitalisation rules; issues related to the allocation of “free capital” for tax purposes to a permanent establishment in the context of the allocation of profits to that permanent establishment; the use of tax treaties to facilitate double dip financing arrangements and cross-border arbitrage with respect to the interest deduction.
• Transfer Pricing in a Downturn Economy: Panellists from the governmental and private sectors analyzed the challenges created by the recent economic downturn for transfer pricing practitioners from the government and private sectors alike. In particular, panellists discussed the extent to which loss-making situations are to be regarded as “arm’s length”, depending in particular on the functional and risk profile of each of the entities of the multinational group to which losses are allocated, as well as the treatment and allocation of restructuring costs (e.g. termination costs, severance payments, write-off of assets) depending in particular on the rights and other assets of the restructured entities and on the expected benefits from the restructuring.
• Attribution of Profits to Permanent Establishments - Designing a Modern Article 7 of the Model Tax Convention: The OECD is on the verge of finalising a new Article 7 of the OECD Model Tax Convention on business profits. This will allow the full application of the conclusions from the July 2008 Report on the Attribution of Profits to Permanent Establishments. Panellists discussed the main differences between the existing Article 7 and the proposed new one.
• Transfer Pricing and Customs: Panellists from the World Customs Organisation and from the government and private sectors discussed difficult questions that typically arise in relation to the possible convergence of valuation rules, the acceptability for customs purposes of transfer pricing post import adjustments and vice versa, and more generally the coherence of a “whole of government” approach in that area.
• Treaty and Transfer Pricing Aspects of Intangibles Characterisation: Panellists from the OECD Secretariat, from governments and from the private sector discussed definitional issues in relation to intangibles and the related treaty and transfer pricing questions. They focused especially on “soft intangibles”, i.e. elements that are not necessarily legally protected intangibles and not always intangible assets recognised for accounting purposes, but are nevertheless regarded as significant value drivers economically and as such may need to be remunerated for transfer pricing purposes.
• Recent court decisions: Finally, several recent court decisions dealing with transfer pricing and treaty issues were presented to the audience.
The Conference was aimed at facilitating a constructive dialogue between private sector representatives and tax administrators and between representatives from OECD and non-OECD economies. It was undertaken in accordance with the OECD ambition of broadening and deepening the international consensus on transfer pricing, in an effort to limit the instances of double taxation created by differing country views and to make the arm’s length principle workable in a satisfactory manner in the globalised economy where domestic systems are highly interdependent.
Participants in last year’s Conference on the 50th Anniversary of the OECD Model Tax Convention overwhelmingly voted the adoption of the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995 as the most important tax treaty development (besides the Model Tax Convention itself) of the past 50 years. Accordingly, this year’s conference had a strong focus on transfer pricing, although a number of related treaty topics were also discussed.
In his opening address, Jeffrey Owens, Director of the OECD Centre for Tax Policy and Administration, stressed the significance of transfer pricing for as well as non-OECD economies in a global economy where multinational enterprises play a prominent role. This is especially relevant in the midst of the current economic challenges, when the location of profits and losses within a multinational group is very sensitive as it directly affects the group’s effective tax rate. Governments also are carefully monitoring the allocation of profits and losses to their jurisdictions, in a context where many of them are striving for a balance between business friendly, pro-growth tax measures and measures to maintain the needed level of tax revenues to support public spending.
These considerations, which are high in the mind of governments and private sector representatives engaged in the OECD work on transfer pricing, were reflected in the Conference programme, which addressed the following topics in a mix of presentations and case studies:
• Adjustments and Corresponding Adjustments: The Role of Articles 7, 9 and 25 of the Model Tax Convention: Panellists from the OECD Secretariat, from governments and from the private sector discussed the treaty limitations related to possible adjustments by a tax administration to the profits of an affiliate or of a branch of a foreign company and examined the extent to which the State of residence of the foreign company is obliged to make a corresponding downward adjustment to eliminate economic or juridical double taxation.
• Information Powers and Transfer Pricing: Documentation Requirements, Exchange of Information and Burden of Proof Issues: Government and private sector representatives discussed the implementation of transfer pricing documentation requirements and the use of exchange of information clauses in transfer pricing audits, as well as related burden of proof and penalty issues, trying to find the right balance between, on the one hand, enabling effective enforcement of transfer pricing legislation by tax authorities and, on the other hand, keeping the compliance burden reasonable and providing reasonable certainty to taxpayers who make documentation efforts.
• Deductibility of Interest in Related Party Situations: Panellists from the government and private sectors discussed the treaty aspects of recent changes to thin capitalisation rules; issues related to the allocation of “free capital” for tax purposes to a permanent establishment in the context of the allocation of profits to that permanent establishment; the use of tax treaties to facilitate double dip financing arrangements and cross-border arbitrage with respect to the interest deduction.
• Transfer Pricing in a Downturn Economy: Panellists from the governmental and private sectors analyzed the challenges created by the recent economic downturn for transfer pricing practitioners from the government and private sectors alike. In particular, panellists discussed the extent to which loss-making situations are to be regarded as “arm’s length”, depending in particular on the functional and risk profile of each of the entities of the multinational group to which losses are allocated, as well as the treatment and allocation of restructuring costs (e.g. termination costs, severance payments, write-off of assets) depending in particular on the rights and other assets of the restructured entities and on the expected benefits from the restructuring.
• Attribution of Profits to Permanent Establishments - Designing a Modern Article 7 of the Model Tax Convention: The OECD is on the verge of finalising a new Article 7 of the OECD Model Tax Convention on business profits. This will allow the full application of the conclusions from the July 2008 Report on the Attribution of Profits to Permanent Establishments. Panellists discussed the main differences between the existing Article 7 and the proposed new one.
• Transfer Pricing and Customs: Panellists from the World Customs Organisation and from the government and private sectors discussed difficult questions that typically arise in relation to the possible convergence of valuation rules, the acceptability for customs purposes of transfer pricing post import adjustments and vice versa, and more generally the coherence of a “whole of government” approach in that area.
• Treaty and Transfer Pricing Aspects of Intangibles Characterisation: Panellists from the OECD Secretariat, from governments and from the private sector discussed definitional issues in relation to intangibles and the related treaty and transfer pricing questions. They focused especially on “soft intangibles”, i.e. elements that are not necessarily legally protected intangibles and not always intangible assets recognised for accounting purposes, but are nevertheless regarded as significant value drivers economically and as such may need to be remunerated for transfer pricing purposes.
• Recent court decisions: Finally, several recent court decisions dealing with transfer pricing and treaty issues were presented to the audience.
The Conference was aimed at facilitating a constructive dialogue between private sector representatives and tax administrators and between representatives from OECD and non-OECD economies. It was undertaken in accordance with the OECD ambition of broadening and deepening the international consensus on transfer pricing, in an effort to limit the instances of double taxation created by differing country views and to make the arm’s length principle workable in a satisfactory manner in the globalised economy where domestic systems are highly interdependent.
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