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OECD’s Current Tax Treaty & Transfer Pricing Agenda

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  1. OECD’s Current Tax Treaty & Transfer Pricing Agenda Mary Bennett Head of Tax Treaty & Transfer Pricing Division, OECD CTPA IFA British Branch Annual General Meeting London, June 17, 2010

  2. Overview of Current Agenda • Major Issues on Tax Treaty Agenda • 2010 Update to the Model Tax Convention • Other projects • Major Issues on Transfer Pricing Agenda • 2010 revision to Transfer Pricing Guidelines • Future WP6 work

  3. Major issues on tax treaty agenda

  4. Major Issues on Treaty Agenda • 2010 Update to the Model Tax Convention • New Article 7 • Collective investment vehicles • Telecommunications • Sovereign Wealth Funds • Short-term assignments (Article 15(2)) • Other projects • Permanent establishment definition clarification • Beneficial owner concept • Non-discrimination – Phase 2 • Article 17 (Artistes and Sportsmen) • TRACE (Treaty Relief and Compliance Enhancement) project

  5. Some Background on the OECD Model • 50 years ago, there were only a few dozen tax treaties in force around the world, and no consensus on any single model text or interpretation • OECD Model Convention issued in draft form in 1963, final form in 1977, revised version in 1992, subsequent updates about every 2 years since then

  6. Some Background • Today there are over 3000 bilateral treaties in force largely based on OECD Model – the US has about 60 • Commentary on the OECD Model – provides the consensus interpretation of Model treaty text • Used by taxpayers and tax administrations to apply treaty provisions • Has been cited by courts in virtually every OECD member country and many other courts as well

  7. Some Background • OECD Council Recommendation – “soft law” recommendation to Member countries to follow Model and Commentary • Member countries can reflect disagreements through “reservations” on Model text, “observations” on Commentaries • Non-member countries can also record their positions on the Model

  8. Key Elements of 2010 Update • New Article 7 • Collective investment vehicles • Telecommunications • Sovereign wealth funds • Short-term assignments

  9. New Article 7 - Background • Final implementation of 2008 PE Profit Attribution Report • For use in future treaties • No change to Article 5 PE threshold

  10. New Article 7 – Main Features • Stresses functional analysis, application of arm’s length principle to dealings • Clarifies that paragraph 2 applies not only to determine profits that the PE State may tax but also for application of Article 23 double tax relief by the other State

  11. New Article 7 – Main Features • Clarifies implications of separate and independent enterprise fiction for other Articles: • Does not create notional income for purposes of other Articles -- i.e. no withholding allowed on notional payments • But some States consider that the fiction should not be so restricted

  12. New Article 7 – Main Features • Eliminates previous prohibition on recognition of internal interest (outside the financial sector) and royalties • Clarifies and extends the situations where arm’s length remuneration for internal service dealings is required

  13. New Article 7 – Main Features • Introduces new paragraph 3 on double tax relief mechanism, analogue to Article 9(2): • Where one State adjusts (and taxes accordingly) the profits attributable to a PE, the other State shall, to the extent necessary to eliminate double taxation, make an appropriate adjustment to the amount of tax charged on those profits

  14. New Article 7 – Main Features • Deletes paragraphs of 2008 Article 7: • Old 7(4) (use of apportionment method) • Old 7(5) (no attribution of profits to purchasing function) • Old 7(6) (required use of same method year by year)

  15. New Article 7 – Current Status • Scheduled for approval by CFA in June, OECD Council in July, publication in September • 2010 “sanitised” version of PE Profit Attribution Report also to be released • 2008 version of PE Report and Article 7 to remain in publication

  16. Collective Investment Vehicles - Background • CIV Project has involved two Informal Consultative Group reports published in January 2009: • one on technical issues of treaty entitlement for CIV income • one on procedural aspects of claiming treaty benefits for portfolio income more generally

  17. CIV Report on Technical Issues • Proposed Commentary additions to address: • Whether CIVs qualify for benefits in their own right • Where they do not, procedures that could be adopted to let them claim benefits on behalf of their investors • Optional provisions countries could include in future treaties to deal with these issues • Final CFA-approved Report released May 31, 2010

  18. Telecommunications Transactions • Proposed Commentary additions to address: • Article 12 non-royalty treatment of payments for satellite capacity, for indefeasible rights over cables and phone lines and for spectrum licenses, and roaming payments • Article 5 non-PE treatment for satellite operators, roaming network providers, lessors of cable capacity

  19. Sovereign Wealth Funds • Proposed additions to Commentary to describe: • sovereign immunity doctrine, • countries’ treaty practices regarding sovereign wealth funds and State-owned entities, • issues relevant to determining treaty entitlement of sovereign wealth funds

  20. Short-term Assignments • Project designed to clarify the circumstances relevant to determining whether an individual’s remuneration for services performed in a State is paid by, or on behalf of, an employer who is not a resident of that State (a condition of the so-called “short-term assignment” exception of Article 15(2)) • Proposed Commentary has several examples

  21. Short-term Assignments • Agreement reached on a single interpretation of Article 15(2) – i.e., States may deny application of Article 15(2) only based on their domestic law meaning of “employment” or in abusive cases • Both findings must be based on objective criteria • Commentary lays out potentially relevant factors • MAP available to resolve disagreements

  22. Status of 2010 Update • Final draft released on May 21, 2010 • CFA approval expected late June • OECD Council approval expected late July • Publication expected in September

  23. Permanent Establishment Definition • Article 5 PE threshold issues – likely to address a series of interpretative issues, including the meaning of: • Contracting “in the name of” • “Preparatory or auxiliary” exceptions • Fixed place of business, meaning of “at the disposal of” • First meetings of Working Group held in September 2009 and February 2010 • Mandate calls for WG report to WP1 in February 2012

  24. Beneficial Owner Concept • WP1 exploring whether it is possible to clarify meaning of term, which appears in Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) • Examining recent jurisprudence from various countries • Discussion currently focused on examples • Not yet determined when discussion draft may be issued

  25. Nondiscrimination • Phase 2 of project launched by an invitational seminar in Leiden in April 2008 • Also was a major topic at IFA Congress in Brussels in September 2008 • WP1 has decided to focus on: • Treatment of cross-border dividends • Relationship between non-tax treaties and income tax • Work to proceed by development of proposals by Secretariat/Informal Group on Nondiscrimination

  26. Article 17 (Artistes and Sportsmen) • Discussion draft on proposed changes to Commentary released April 23, 2010, comments due by July 31 • Issues addressed: • What is an entertainer or sportsman? • Application of Article 17 to race prizes • What are the personal activities of an entertainer or sportsman “as such”? • Source and allocation rules for activities performed in various countries • Special categories of payments (e.g. merchandising, broadcasting, image rights)

  27. TRACE Project – What It Is • “Treaty Relief and Compliance Enhancement” project: • the new phase of the work begun by the CIV Informal Consultative Group on procedural aspects of claiming treaty relief on cross-border portfolio investment income

  28. TRACE Project – ICG Report Background • ICG January 2009 Report on procedural issues made “best practice” recommendations: • Intermediaries would enter into contracts with source countries • Claims would be allowed on basis of tax rate pools • However, reporting of beneficial owner information to source country could be required • Source countries would retain right to review compliance • Countries would work on standardising reporting and documentation to minimise the burden for intermediaries • Should no longer need certificates of residence

  29. TRACE Project – Pilot Group Background • 2009 follow-up to ICG Report -- CFA approved creation of Pilot Group to develop standardised documentation to: • streamline procedures to maximise adoption by business; • facilitate adoption by countries; and • ensure information can be used by governments • Ongoing cooperation with EU group conducting parallel work • EU “Recommendation” released October 19, 2009

  30. TRACE Project – Pilot Group IP • Pilot Group’s draft Implementation Package released in February (comments due by August 31, 2010) includes: • the application to be used by a financial intermediary to act as an “authorised intermediary”; • the authorised intermediary contract between the source country and the financial intermediary; • agreed procedures that the authorised intermediary would follow in implementing the system; • the forms to be used under the system (e.g. investor self‑declarations, intermediary declarations, annual information reporting forms, etc.); • a description of the procedures to be followed by the independent reviewer, etc.

  31. TRACE Project – CFA January Decisions • CFA decisions in January 2010: • Project renamed “TRACE” to emphasize its dual focus and its relevance beyond CIV structures • TRACE IT Expert Group (business and government) to address technology issues of info reporting and EOI, and to do pilot test • TRACE Group (government only) to further develop Implementation Package with a view to endorsement by CFA – to coordinate with EC • Standing Advisory Group of business representatives to assist and consult with TRACE Group

  32. TRACE Project – Next Steps • TRACE IT Expert Group • first meeting held on May 18, 2010 • pilot test in 2011 • report to CFA in 2012 • TRACE Group • first meeting in autumn 2010 • update report to CFA in June 2011 • final report by January 2013

  33. Major issues on transfer pricing agenda

  34. Major Issues on Transfer Pricing Agenda • 2010 revision to the Transfer Pricing Guidelines: • Comparability and profit methods (Chapters I-III) • Business restructurings (new Chapter IX) • Future work for WP6: • Intangibles (Chapters VI and VIII) • Risk assessment / administration (Chapter IV) • Monitoring – enhanced following of countries’ legislation, regulations and administrative practices

  35. Comparability and Profit Methods • Related projects, begun in 2003 – discussion drafts, public consultation • First major revision to Transfer Pricing Guidelines since published in 1995 • Re-writes Chapters I-III

  36. Choice of the TP Method • In the 1995 TP Guidelines, transactional profit methods (TNMM and profit split) are last resort methods, to be used only in exceptional cases where there are insufficient data to rely on traditional methods (CUP, resale price, cost plus) • Proposal -- to remove the exceptionality and replace it with a standard whereby the selected transfer pricing method should be “the most appropriate method to the circumstances of the case”, based on 4 criteria

  37. Choice of the TP Method • The 4 criteria: • The respective strengths and weaknesses of each of the OECD TP methods; • The appropriateness of the method in view of the nature of the controlled transaction, determined in particular through a functional analysis; • The availability of reliable information (in particular on uncontrolled comparables) to apply the selected method or other methods; and • The degree of comparability, including reliability of any comparability adjustments needed.

  38. Choice of the TP Method • The general preference for traditional methods over profit methods would not be simply abolished: • Where, taking account of the criteria described above, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method

  39. Profit Methods – New Guidance • Application of the transactional net margin method (TNMM): • Standard of comparability • Selection and determination of the net profit margin indicator • Application of a transactional profit split method: • Determining the combined profit to be split • Reliability of a residual analysis and a contribution analysis • How to split the combined profit

  40. Comparability – New Guidance • typical process for a comparability analysis • the aggregation of a taxpayer’s separate and combined transactions • disclosure of information on the foreign associated enterprise • internal and external comparables • the use of foreign comparables • secret comparables • cases where information on potential comparables is missing • comparability adjustments • determination of the arm’s length range and use of statistical tools • loss-making comparables • timing issues in comparability • evaluation of transactions with significant valuation uncertainties

  41. Business Restructuring -- Background • Project began in 2005, to look at treaty and transfer pricing aspects of business restructurings -- Articles 5 (PE), 7 (Business Profits) and 9 (Associated Enterprises) • Article 5 issues to be dealt with by WP1 as part of general review of PE issues • Article 7 issues already largely addressed by PE Profit Attribution Report • Discussion draft on Article 9 transfer pricing issues published on September 19, 2008 (“BR TP Report”) • Public consultation held in 2009 • Final result to be new Chapter IX of TPG in 2010 update

  42. Report on TP Aspects of BR • Four Issues Notes: • Special considerations for risks • Arm’s length compensation for the restructuring itself • The application of the arm’s length principle and the TP Guidelines to post-restructuring arrangements • The exceptional circumstances when a tax administration may consider not recognizing a transaction or structure adopted by a taxpayer

  43. BR Report – Some Key Points • More consensus than non-consensus • Starting point is not abusive cases • MNEs free to organise their business; tax administrations draw tax consequences on the basis of existing rules • Same ALP of BR and post-BR as for others • Absence of comparables does not mean non-AL • Profit potential not an asset: decrease of PP not a taxable event per se

  44. BR Report – Some Key Points • Article 9: starts from contracts (respected only if actual behaviour + AL); AOA for Article 7 is a different analytical framework • Examine rights and other assets (but OECD does not agree that only protected intangibles would be remunerated at AL) • Look at perspectives of both parties • Non-recognition of transactions exceptional: pricing solutions preferred

  45. Transfer Pricing Aspects of Intangibles • Current guidance: TPG Chapters VI and VIII • Emerging issues: • Definition (“soft intangibles”): marketing intangibles, workforce in place, business opportunities, etc.: Are they intangibles? More importantly, should they be compensated at AL? • Legal / economic ownership; right to share in the return of an intangible that is owned by another party • Valuation methods

  46. Administrative Aspects of Transfer Pricing • WP6 held a workshop in November 2009 on TP administrative aspects: • Simplification measures (including safe harbours): pros and cons, consistency with ALP • Risk assessment, “smart” TP documentation • TP examination procedures • APAs • Etc. • WP6 to follow up on these issues (e.g., sharing experience, reviewing guidance on safe harbours, etc.)

  47. Increased Monitoring Activities • Issue reviews: look at the approach taken by all member countries to a particular issue of widespread significance • Role of business community: • Identify problematic issues (preferably illustrated with practical but hypothetical examples) which raise questions about the internationally consistent application of the TPG • BIAC invited to present practical difficulties in monitoring the application of the TPG

  48. Following and Engaging in Our Work • Visit our webpage: www.oecd.org/taxation • Sign up for OECD Tax News e-mail alerts through “OECDdirect” in the online services portion of the OECD home page: www.oecd.org

  49. Thanks for your attention!