BEPS Actions 8-10. Aligning of Transfer Pricing outcomes to value creation
Probably, the most important issue addressed by the OECD on its action plan vs. base erosion and profit shifting is transfer pricing. The new rules main objective is to guarantee that “that profits are taxed where economic activities generating the profits are performed and where value is created”. In order to avoid a manipulation of the arm´s length principle by shifting functions, assets and risks, the new guidelines propose several modifications, but mainly in three areas:
intangibles (action 8), as far as the incorporation to the new concept of an intangible for transfer pricing purposes, the distinction among the economic and legal ownership of these type of assets, as well as the cases where there is a transfer of hard to value intangibles; risk and capital (action 9), in consideration of the contractual distribution of risks where these do not correspond to economic reality of the intercompany operations, as well as the cases where the performance of financial entities do not correspond to their economic activity, and high risk transactions (action 10), regarding the cases where intercompany transactions must be reclassified, the use of transfer pricing methods to assign profits without considering the actual economic activity of the group and the omission of certain administrative payments that do not contribute to value creation for the recipient and also erode the taxpayer’s taxable base.
It is
important to mention the modifications to the Transfer Pricing Guidelines in
their current 2017 version, assimilating actions 8-10 of the BEPS plan
published in October 2015, is an unpresented effort by part of the OECD to
adapt the regime to the current economic context and business reality. The OECD
warns that should it not be possible to contain the transfer of profits due to
the wrongful use of the transfer pricing rules; these will eventually lead to
additional measures beyond the regulatory framework in regards to the
application of the arm’s length principle to contain taxpayer’s aggressive tax
practices.
The new rules: a review of the application of the arm’s length principle (relevant topics)
One of the main goals of the BEPS plan is to guarantee the functionality of the arm’s length standard. To achieve this goal, the OECD is enhancing the regulatory framework by providing additional rules and clarifications.
Substance over form. Identification of commercial or financial relationships of the intercompany transaction.
Following the
recommendations provided by the BEPS plan on its action 9 (Risk and Capital), the
2017 Guidelines substantially modified Section D: “Guidance for applying the
arm’s length principle” to underline that intercompany transactions “must be
carried out by an analysis of the real economic activities of the parties in
the transactions”. Particular emphasis is given to the analysis of the
intercompany contractual terms and the correspondent distribution of risks
between associated companies. The following is a review of the new standards:
Contractual terms
One of the steps prior to the confirmation of the arm length value of any intercompany transaction is the analysis of its contractual terms. This is because, contrary to what happens between independent third parties, it is possible that related parties have no incentive to follow market rules or even that having negotiated clauses that would have been agreed between third parties, these in practice are modified affecting the tax base of one of the participants of the operation.
Considering
this, and attending the recommendations of the BEPS plan in its actions 8-10,
the review of the contractual terms that dictate intercompany operations and
the consistency of said terms with the characteristics of the intercompany operation,
functions carried out, assets employed and risks assumed (not only when
pertinent considering the risk in regards to the transaction but also in
relation to the economic capacity and control of the contracting parties on the
risks assumed) are strictly necessary to avoid a potential reclassification of
the operation, or eventually the dismissal of the agreed upon contractual
terms, along with the resulting impact on the taxable base of the participants
of the operation.
Example (contractual terms that differ from the economic reality of the operation). 1.44 of the 2017 Transfer Pricing Guidelines.
Company P is the parent Company of an MNE group situated in Country P. Company S, situated in Country S, is a wholly-owned subsidiary of Company P and acts as an agent for Company P’s branded products in the Country S market. The agency contract between Company P and Company S is silent about any marketing and advertising activities in Country S that the parties should perform. Analysis of other economically relevant characteristics and in particular the functions performed, determines that Company S launched an intensive media campaign in Country S in order to develop brand awareness. This campaign represents a significant investment for Company S. Based on evidence provided by the conduct of the parties, it could be concluded that the written contract may not reflect the full extent of the commercial or financial relations between the parties. Accordingly, the analysis should not be limited by the terms recorded in the written contract, but further evidence should be ought as to the conduct of the parties, including as to the basis upon which Company S undertook the media campaign.
Risks. Effect on the compensation of the participants of an intercompany transaction.
Prior to the implementation of action 9 (Risk and Capital) from the Transfer Pricing Guidelines, the comparability analysis requires a detailed description of the functions, risks and assets assumed by the taxpayer in the analyzed operation[1]. Said requirement usually only stated a broad description of functions, risks and assets but did not consider the relationship among them and its effect in the operation, nor the taxable base of the taxpayers.
The previous was the reason why the Transfer Pricing Guidelines were modified in 2017. The first change in this regard is the definition of risk proposed by the Guidelines: “the uncertainty in achieving business objectives[2], from this definition the following is suggested when conducting a transfer pricing analysis: i) identification of the risks relating to the taxpayer’s activities, ii) identification of the entity that carries out activities that control said risks, and iii) confirmation of the arm’s length distribution of the risks, with the understanding that the risks absorbed by one participant of the transaction, however, were not controlled by it, and so must be reassigned to the party that truly has control over the risks and has the financial capacity to assume their eventual materialization.
The review to the standard of intercompany risks analyses brings with it several considerations. The Transfer Pricing Guidelines are explicit in stating that when an entity providing financing has control over a financial risk related to the financing function, but that does not have control over another function, it may only expect a risk free return as a result of the financing granted[3]. The previous may jeopardize the feasibility of, for example, certain centralized treasuries or cost contribution agreements for the development of intangibles, and therefore it is necessary that taxpayers carry out a review in order to adapt to the new risk standard so as to avoid a potential contingency in this regard.
Example: Identification of risks and confirmation of the arm’s length condition of the same. 1.84 of the 2017 Transfer Pricing Guidelines.
Company B manufactures products for Company A. Under step 1 capacity utilization risk and supply chain risk have been identified as economically significant in this transaction, and under step 2 it has been established that under the contract Company A assumes these risks. The functional analysis under step 3 provides evidence that Company B built and equipped its plant to Company A’s specifications, that products are manufactured to technical requirements and designs provided by Company A, that volume levels are determined by Company A, and that Company A runs the supply chain, including the procurement of components and raw materials. Company A also performs regular quality checks of the manufacturing process Company builds the land, employs and trains competent manufacturing personnel, and determines production scheduling based on volume levels determined by Company A. Although Company B has incurred fixed costs, it has no ability to manage the risk associated with the recovery of those costs through determining the production units over which the fixed costs are spread, since Company A determines volumes. Company also determines significant costs relating to components and raw materials and the security of supply. The evaluation of the evidence concludes that Company B performs manufacturing services. Significant risks associated with generating a return from the manufacturing activities are controlled Company A. Company B controls the risk that it fails to competently deliver services. Each company has the financial capacity to assume its respective risks.
Reclassification and/or disallowance of transactions among related parties
The main premise of the taxpayers when carrying out an intercompany operation should be to consider the negotiation process that would have been carried out by independent third parties. In light of the BEPS regulatory framework, Transfer Pricing documentation should focus on demonstrating that, in effect, such process was considered, and not only if “comparable” operations are carried out by independent third parties[4].” Â
Should the circumstances in which the transactions were carried out differ from those that would have been carried out by third parties, or simply lack economic reasoning, the OECD, with the due safeguards, proposes that said transactions: 1) be restructured to reflect the actual conduct of the parties involved in the transaction, and 2) in the worst of cases, these are simply dismissed. Even though the Transfer Pricing Guidelines emphasize that reorganization of operations should only take place in exceptional cases. It is important that the taxpayer consider these scenarios given the possibility of being exposed to potential financial risk.
Example: Disallowance of intercompany transactions. (From OECD Transfer Pricing Guidelines 1.126)
Company S1 carries on a manufacturing business that involves holding substantial inventory and a significant investment in plant and machinery. It owns commercial property situated in an area prone to increasingly frequent flooding in recent years. Third-party insurers experience significant uncertainty over the exposure to large claims, with the result that there is no active market for the insurance of properties in the area. Company S2, an associated enterprise, provides insurance to Company S1, and an annual premium representing 80% of the value of the inventory, property and contents is paid by Company S1. In this example S1 has entered into a commercially irrational transaction since there is no market for insurance given the likelihood of significant claims, and either relocation or not insuring may be more attractive realistic alternatives. Since the transaction is commercially irrational, there is not a price that is acceptable to both S1 and S2 from their individual perspectives .
Under the guidance in this section, the transaction should not be recognised. S1 is treated as not purchasing insurance and its profits are not reduced by the payment to S2; S2 is treated as not issuing insurance and therefore not being liable for any claim.
Important considerations regarding comparability: location savings, local market characteristics, integrated work teams, group synergies, commodities.
The 2017 Transfer Pricing Guidelines relate to additional issues that are relevant for the adequate evaluation of the arm’s length nature of the operations. They are the following:
Location Savings[5]
A relevant issue as it pertains to comparability has to do with the distribution of the benefits obtained through the realization of economic activities in geographical locations that offer competitive advantages. For example, how much would it cost to produce a good in an emerging economy vs the cost of producing it in a developed economy? Intuitively, it would seem that certain emerging economies offer competitive advantages attributable to labor costs, its location per se, or even economies of scale. These advantages could surpass the costs from the relocation of functions to other markets (for example, infrastructure might be deficient, an inconsistent judicial system, capital costs are higher). The Transfer Pricing Guidelines touch on the subject in principle, considering the potential effect of distributing the savings. In the restructurings of groups, but for all cases, they establish general rules pertaining to the treatment of savings arisen from geographical location, should these exist. For these purposes, the Guidelines propose the consideration of: i) whether there are in fact location savings, ii) the amount of such savings, iii) whether these savings are retained by a member of the group or if they end up being transferred to independent clients or suppliers, and iv) in case of withholding of the savings, the way in which independent third parties would assign any net savings[6] by geographical location:[7]
The mechanism proposed by the OECD has the intention to dissuade erosion on the taxable base from the distribution of the benefits that do not follow the process that would have been agreed upon among independent parties. However, the rules proposed are complicated to execute given the lack of publicly available information regarding national markets and their participants. Given the impossibility to create a national benchmark, the Guidelines suggest the use of comparability adjustments, but again without specifying which to apply or in which circumstances they should be deployed.
A controversial topic: local market characteristics vs comparable market characteristics[8]
Alongside the eventual location savings, and their distribution, is the use of transfer pricing methods with comparables that do not come from the geographical market in which the operation is taking place. The economic analysis of the intercompany transactions, which conforms to the standard stated in the Guidelines, should consider the economic circumstances of the market, an important comparability factor in the analysis. Specifically, the analysis must describe the market, its intensity or competitiveness, its maturity, and any other factor that may influence the price or profit margin of the analyzed transaction. The previous is strictly necessary as the lack of an appropriate economic analysis could negatively impact the selection of a comparable, and consequently the conclusions evaluating the arm’s length nature of the analyzed transaction.
The Transfer Pricing Guidelines mention that it is preferable to use domestic comparables as the best alternative to evaluate the arm’s length nature of any intercompany transaction. However, in cases that for whatever reason it is impossible to use domestic comparables, the OECD’s point of view is that the use of foreign comparables is possible if and when factors such as the advantages or disadvantages between the markets being compared, and the effect that these could have in the income and the costs and expenses of the operation are weighted in the analysis.
Of course in the case that there are significant differences between the markets relevant to the comparable transactions, these must be identified and eventually adjusted. Unfortunately, the Guidelines do not give recommendations as to the adjustments that should be applied in these circumstances, their operating dynamic, the relevant variables to consider regarding the effect or the adjustment on the price or profit margin of the operation, whether the adjustments should be general if the differences are usually identified in similar analyses, or if these should be applied in a particular case being analyzed. This situation may, without a doubt, lead to controversies for the taxpayers and the authorities. Even the “Platform for collaboration on tax. Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses”[9] recently launched by the Platform for Collaboration on Tax integrated by the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), The United Nations (UN) and the World Bank (WB) does not give substantial directives on the matter. The referenced Guide mentions the following: “No specific guidance on how differences in economic market conditions are to be assessed nor how any potential adjustments should be conducted is currently available. Despite the widespread use and acceptance of other markets data, there is a lack of detailed practical guidance at the country, regional, and international level regarding their selection and potential adjustments. The OECD Transfer Pricing Guidelines and the UN Practical Manual on Transfer Pricing only have a general provision that comparability and, in particular, the economic-market conditions must be assessed and adjusted where appropriate.[10]”
The Guide evaluates (inconclusively) the possibility of using comparable markets to those where the intercompany transaction takes place, or eventually, the use of country risk adjustments including a premium or discount to the financial indicator associated to the transfer pricing method being employed, or even adjustments in which working capital is employed to adjust for differences in geographical markets. In any case, it is necessary to point out that none of these approaches has fully been examined, and there should be a broad discussion on this topic so as to avoid situations that leave taxpayers defenseless and lead to unnecessary controversies with the authorities.
Assembled Workforce[11]
The Guidelines address the possibility of the existence of an “assembled workforce” that allow taxpayers to price or generate profit margins that differ from those that would have been obtained in the absence of these work teams, in which case it will be necessary to implement comparability adjustments that eliminate the effect of the differences that could have been generated.
The Guidelines also consider the cases where said assembled workforce is transferred due to the restructuring of a multinational group, and indirectly implies the transfer of intangibles from one business to another, in which case, these must be considered according to Chapter IV of the Guidelines (Special Consideration for Intangibles).
MNE Group Synergies[12]
Another issue that may significantly influence the comparability analysis is the existence of “group synergies” in the controlled transaction and/or in the comparable transactions. The existence of synergies may lead to higher prices or a greater profit margin, or a margins attributable to lower costs, consequence of the said synergies, advantages that are not available to individual companies. The guidelines provide some examples, generally obtained from the centralization of functions, elimination of duplicities or the use of the power of negotiation to obtain, for example, better financing. The Guidelines state, in principle, that the group should not be compensated due to incidental benefits as a consequence of economies of scale, and that the deliberate conduct in benefit or detriment of any members of the group must be subject to analysis. The Guidelines also suggest to consider: i) the nature of the advantage or disadvantage as a consequence of the deliberate action of the group, ii) quantify the advantage or disadvantage arisen from the action of the group, and iii) how the results of said deliberate action are distributed among the members of the group (normally as a function of their contribution to the synergy) after compensating the related party that centralizes the function that generated the saving. Â
Commodities
The 2017 Transfer Pricing Guidelines, addressing the mandate of action 10 regarding the establishment of transfer pricing rules for transactions commonly carried out to erode the taxpayer’s tax base, incorporate a completely new section that includes Chapter II (Transfer Pricing Methods) in the treatment of intercompany transactions that involve commodities such as minerals, unprocessed agricultural products, energizing products, etc. The Guidelines define a commodity as: “physical products for which a quoted price of the commodity is used as a reference by independent parties in the industry to set prices in uncontrolled transactions”, as well as of quoted price: “the price of the commodity in a relevant period obtained in an international or domestic commodity exchange market”[13]
In regards to commodities, the Guidelines prioritize the use of the Comparable Uncontrolled Price Method[14] in the analysis to evaluate the arm’s length nature of these transactions, even in relation to the available information of the value of the good at the moment the transaction is carried out in markets specialized in these type of operations. The Guidelines emphasize that in the case that there are differences among the controlled and uncontrolled transactions being analyzed, attributable to physical characteristics, contractual terms, delivery or payment terms, etc., these must be identified and eliminated through the implementation of comparability adjustments.
To complement the Guidelines, and relating to the transactions that may be carried out in Mexico, it is convenient that the taxpayers consider the additional comments made by Platform for Collaboration on Tax integrated by the International Monetary Fund (IMF), The United Nations (UN) and the World Bank (WB) as a practical guide to face the difficulties associated with the lack of comparables in a transfer pricing analysis, which includes a supplementary report on mineral prices sold in an intermediate form[15].
Scope of the use of the Profit Split Method
One of the unresolved issues in the Transfer Pricing Guidelines has to do with the use of the Profit Split Method[16] when it is employed to distribute benefits in the context of global value chains. The OECD, addressing the mandate imposed by action 10 of the BEPS plan (High-Risk Transactions), published a draft for discussion in December 16, 2014 regarding the use of this method and then carried out a series of public discussions and even a new draft released in July of 2016, for which there was final public discussion during the 6th and 7th of November 2017. From the comments sent as a result of this conference, the OECD will determine a definitive posture relating to this issue. The consultation of the OECD to interested parties in the issue required feedback on the cases where the Profit Split Method is appropriate in the distribution of future or present profits. Likewise, feedback was requested regarding the factors that should be considered to apply the method, as well as about the mechanisms for the distribution of profits that could be used by the participants of the intercompany transaction.
Intangibles: A substantial reform of the transfer pricing regime
One of the OECD’s main concerns concerning the mechanisms employed by taxpayers for the erosion of the taxable base has to do with the use of intangibles, particularly about the distortion of their value in controlled operations, or even the strategic distribution to preferential tax regimes, without consideration to the applicable transfer pricing rules. Therefore, Chapter VI of the Transfer Pricing Guidelines was substantially modified so as to provide additional rules that limit the possibilities for the use of these type of assets in aggressive tax planning. The highlights of these changes are the following:
Concept of an intangible. Action 8 the BEPS plan, and now the Transfer Pricing Guidelines, provide a new concept of intangibles and their use in the context of controlled transactions as: “something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances[17].
Distinction between legal and economic ownership of an intangible. A very important change is the OECD’s proposal relating to the distinction between the legal and economic ownership of an intangible. The OECD Guidelines state: “For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible[18]”. If the legal owner does not carry out the functions, contributes to the assets or incurs in the risks[19] associated with the development, enhancement, maintenance, protection and exploitation of the intangible it owns (DEMPE functions), whichever entity that carries out the DEMPE functions could acquire economic ownership of said intangible, or, at least be entitled to a return for the functions performed along with the income resulting from the alienation or use of the intangible. As an example, and to illustrate how the entities that carry out the functions should be compensated, the Guidelines emphasize cases in which some entity of the group does not carry out the functions associated with obtaining the intangible, but only finances its execution, it should only be entitled to a risk free premium for the performance of its investment, and not to the income derived from the alienation or exploitation of the intangible.
Economic analysis of operations involving intangibles. The Guidelines propose some basic assumptions to the arm’s length analysis of operations that involve intangibles[20]. They require that sufficient detail is given to: i) the intangible in the transaction, ii) the related parties that have legal ownership of the intangibles in question, iii) the DEMPE functions deployed by the involved parties in the transaction (even when these are subcontracted), iv) the consistency in the legal and economic conduct of the parties, including the capacity to assume risks derived from carrying out the DEMPE functions by any of the contracting parties, v) the confirmation of the adequate organization or correction of the transaction, and vi) the confirmation of the arm’s length nature of the transaction:
Comparability analysis of the operations that involve intangibles. The comparability analysis of the licensing or sale of ntangibles is in itself complicated; therefore, the Guidelines provide some variables that should be at least considered in the analysis of these type of operations. One should consider: i) whether there is exclusivity in the licensing of the intangible, ii) the period in which legal protection is offered, iii) the geographical market where the intangible is licensed, vi) the rights to enhancements, revisions and updates, and vii) the expectations of future income that could be associated with the intangible.
Returns on intangibles that do not provide value. The Guidelines emphasize that not all cases that involve the exploitation of an intangible require compensation. As an example, they consider that the use of a commercial trademark, that in principle, should not trigger a payment when the use is limited to solely identifying the entity as part of a multinational group[21].Â
Use of valuation techniques. For the cases where intangible assets are alienated to estimate the value of the same, it is necessary to use valuation techniques. The Guidelines provide suggestions on the use of said techniques, and suggest standards for precise financial projections; use of discount rates, calculation of the useful life of the intangibles, and the terminal values of the same.
Hard to value intangibles. Lastly, the new Chapter VI states that certain considerations regarding hard to value intangibles (those intangibles or the rights over intangibles for which, at the time of their transfer among related parties: i) there are no reliable comparables, and ii) at the time when the transaction takes place there is uncertainty in in the projection of cash flows o future income linked to the transferred intangible making it difficult to predict the success that the intangible would have at the moment when the transaction takes place[22]. The Guidelines address this by suggesting the establishment of a set of clauses that allow the revaluation of the intangible at the moment after its alienation, except if the taxpayers carry out procedures that demonstrate that the participating taxpayers of the transaction made all necessary efforts to establish an adequate compensation for the transfer of the intangibles in question, and provides information that shows the assumptions of the valuation did not deviate higher than 20% to the market value of the intangible in the five years prior to its transfer.
The reforms to the
transfer pricing regime relating to intangibles are many, and taxpayers should
certainly evaluate them for each of their individual cases. Additionally, it is
important to consider the holistic approach proposed by the OECD that links
action 8 with at least action 1 (Addressing the Tax Challenges of Digital
Economy), 5 (Harmful Tax Practices), and 13 (Country-by-Country reporting and
Transfer Pricing Documentation). This last action requires that at least there
be a transfer pricing master file that recounts the policies of the
multinational group in regards to the generation and use of intangible assets,
and that the local report clearly illustrate the participation of Mexican
taxpayers within the group.
Low value added services. A simplified approach for the transfer of administrative services
Conforming to the mandate in action 10 (High Risk Transactions) relating to the establishment of mechanisms that deter the erosion of the taxable base through administrative charges (management fees and head office expenses), the OECD proposes (at the discretion of the taxpayer) the use of a pre-established profit margin (safe harbor) of 5% over total costs for services considered to be of “low added value”[23]. Mexico has not formalized its adherence to the use of a safe harbor, however, one can assume that since this approach has been established in the Transfer Pricing Guidelines, its use will become immediately incorporated, given that which is stated in the last paragraph of article 180 of the Mexican Income Tax Law[24] (LISR) “for the interpretation of that which is stated in this Chapter[25], the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the Council of the Organization for Economic Development and Cooperation in 1995, or those that substitute them (now the Guidelines of 2017), will be approvable so long as they are congruent with that which is stated in the Law and the treaties signed by Mexico in this matter”.
When selecting this option, should the taxpayers decide to do so, it will be necessary to identify the services that would be affected by this definition: “[low value added services] a) are supportive in nature, ii) are not part of the core business of the MNE group, iii) do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles, and iv) do not involve the assumption or control of substantial or significant risk for the service provider,[26]”. Subsequently, and in the absence of a “benefit test”, which is usually done to validate the economic substance of the services received, the taxpayer would have to employ the following procedure to determine the costs of the services that are being transferred.
It is important to mention that the OECD, in addition
to the use of this simplified transfer of services procedure, proposes the use
of “charge limits”, estimated through different financial indicators, and
establishes that the transfer of expenses arising from this mechanic exceeds
the expense limits estimated by the authorities, these may not accept the use
of this simplified procedure and will evaluate intercompany expenses by their
individual merits under the traditional approach that analyzes the arm’s length
condition of the same. It is also important to note that, at this moment, the
Mexican tax authorities have not set a formal position as it pertains to this
topic or any other relating to the use of a services safe harbor, and therefore
its use must be evaluated.
Cost Contribution Agreements, adapting to new risk and capital standards
An important addition to the Transfer Pricing Guidelines relates to Chapter VIII (Cost Contribution Agreements). The OECD establishes that a cost contribution agreement is “a contractual agreement among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create benefits for the individual businesses of each of the participants[27].
Cost contribution agreements are relevant for the correct organization of intercompany operations as these allow the ordered participation of the members of a multinational group. Additionally, for cases involving intangibles or services, they allow the realization of projects that, given their nature, would be very difficult to be carried out by a single entity.
In order to confirm the arm’s length condition of the participants in accordance to the contribution of costs, the Transfer Pricing Guidelines, addressing BEPS actions 8-10, establish that: i) all of the parties in the agreement should have an expectation of a present or future benefit regarding the object of the agreement, ii) calculation of the contribution value of each of the parties in the agreement, and iii) distribution of the benefits obtained by the agreement corresponds to the contribution of each of the parties.
One must emphasize that as it pertains to the new regulatory framework, the participants of a Cost Contribution Agreement must confirm the economic substance of their participation in such agreement, and confirm the correlation of their conduct and the contractual terms agreed upon, have control of the risks associated with its participation in such agreement, and have the financial capacity to face such risks[28]. In cases of Cost Contribution Agreements intended to obtain intangibles, and these are difficult to value, the rules set in the Transfer Pricing Guidelines Chapter VI in its sections D.3 and D.4 must be taken into account.
Finally, it
should be noted that the updates to the regulatory framework of Cost
Contribution Agreements are relevant for Mexican tax purposes in light of the
requirements suggested by the Mexican tax authorities to secure deductions of
pro-rata expenses in the miscellaneous tax rule 3.3.1.27 for 2018. The previous
should lead taxpayers to an immediate and exhaustive review of their Cost
Contribution Agreements that regulate the payment of these expenses so as to
guarantee the deduction of the same under the new BEPS framework.
Conclusions
The BEPS plan
introduced notable changes to the transfer pricing regulatory framework. There
is an urgent need to disallow any attempt to use the transfer pricing rules in
a manner which is contrary to its original purpose. Consequently, an evaluation
of the current intercompany policies within the multinational group is needed
to assure alignment to the BEPS plan and avoid future controversies with the
tax authorities. The changes in the regime will be monitored by the tax
authorities using a wide array of mechanisms, particularly the the country by
country (CbC) report and their information exchange mechanisms. We urge you to
require an assessment of your current transfer pricing status and to take all
the needed measures to avoid a tax contingency.
[1] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2010, D. D.1.2.2.
[2] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, 1.71
[3] OECD Transfer Pricing Guidelines 2017, VI, 6.61.
[4] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. 1.123
[5] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. D.6.1.
[6] The cost benefits from its location, labor costs, specialization, considering, for example, deficient infrastructure, transfer risks, etc. Â
[7] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017 1.141
[8] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. D.6.2
[9] Platform for collaboration on tax. Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses, June 2017
[10] Platform for collaboration on tax. Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses, June 2017 Pp. 57
[11]OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, D.7
[12] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, D.8.
[13] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. 2.18
[14] LISR 180-I
[15] Plataform for collaboration on tax. Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses, June 2017
[16] LISR 180-IV.V
[17] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. 6.6.
[18] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. Â 6.42
[19] The analysis of the risks associated with the deployment of DEMPE functions should be considered in the context of the new provisions proposed by the Transfer Pricing Guidelines in Section D.1.2 (Risks).
[20] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. Â 6.34
[21] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, 6.81.
[22] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, 6.189.
[23] Cases where the service provider also carries out this activity with third parties are excluded, where the operation would have to be analyzed through the use of internal comparables (7.46)
[24] In Spanish: Ley del Impuesto Sobre la Renta
[25] Chapter VI of the “TĂtulo II de la LISR” (Multinationals)
[26] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, 7.45.
[27] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. Â 8.3:
[28] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. Â 1.60
