Aligning Transfer Pricing Outcomes with Value Creation
[p27] The purpose is to align transfer pricing outcomes with value creation. This can be achieved with the arm’s length principle (meaning: controlled transactions are priced as if the enterprises were independent); embedded in treaties (OECD & UN Model: Art 9(1)); interpreted in the OECD TP Guidelines (1979, revised in 1995, updated in 2010). However, the existing application of the arm’s length principle is vulnerable to manipulation because it emphasises on contractual allocations of functions, assets and risks so that the outcomes are not aligned with value creation among MNE members.
[p27-29] Therefore, the BEPS Action Plan required the guidance on the arm’s length principle to be clarified and strengthened, or if the risks remain: introduces special measures either within or beyond the arm’s length principle. This BEPS Action Plan focuses on three key areas.
First, TP issues relating to intangibles (Action 8) -> revised guidance: legal ownership alone does not necessarily generate a right to all (or any) of the return from the exploitation of the intangible
Second, contractual allocation of risk that may not correspond with the activities actually carried out; including funding returns that do not reflect activity undertaken by the funding company (Action 9) -> revised guidance: risks: the effect of uncertainty; yang dilihat adalah conduct, bukan contract; If the funder does not in fact control the financial risks associated with its funding (example, funder does not assess creditworthiness), then the profits will not be allocated to it more than a risk-free return [“cash boxes” is the terminology for capital-rich entities without any other relevant economic activities]; synergistic benefits of group operation will be allocated to members that have contribution (misalnya, discounts from purchase volume of group companies will be allocated to these group companies).
Third, Other high-risk areas (Action 10) incl. commercially irrational transactions, the use of TP to divert profits or erode the tax base such as management fee and head office expenses.
[p29-30] Other points:
- The revised guidance will operate hollistically. For example, issue cash boxes links to Action 9 with maximum risk-free return, Action 4 preventing to treaty abuse to avoid withholding mechanism, Action 3 with CFC rules to capture the cash boxes and Action 13 with transparency requirement (TP Doc).
- this report contains guidance on transactions involving commodities as well as on low value-adding intra-group services to improve access to relevant TP information through Action 13.
- TP involves subjective interpretations of facts and circumctances -> potential dispute, = potential double taxation -> Action 14: dispute resolution mechanisms: access to MAP (Art 25 Model Treaty Convention) for all TPP cases is a new minimum standard; the 20 countries commit to mandatotry binding arbitration.
 [p30] With the work under Actions 8-10 plus the holistic nature that will be explained below, the goals as set above have been achieved without the need to develop special measures outside the arm’s length principle.