BEPS Actions 8-10 – Align Transfer Pricing Outcomes with Value Creation

BEPS Actions 8-10, “Aligning Transfer Pricing Outcomes with Value Creation” includes new guidance on how to allocate transfer price risk, transfer price intangibles, hard-to-value intangibles (HTVI), commodities, low value-adding intra-group services and cost contribution arrangements.

Specifically, the Final Report on BEPS Actions 8-10 sets out the aims of the Actions as follows:

  • Action 8 – develop rules to prevent BEPS by moving intangibles among group members, including drafting effective provisions and updating the guidance on cost contribution arrangements.
  • Action 9 – develop rules against transferring risks among, or allocating excessive capital to, group members. That would involve rules that align returns with value creation.
  • Action 10 – develop rules to prevent BEPS by engaging in non-commercial transactions.

The transfer pricing rules, which are set out in Article 9 of tax treaties based on the OECD and UN Model Tax Conventions and the Transfer Pricing Guidelines, and OECD guidance on the arm’s length principle, have been clarified and strengthened.

Action 8 focused on the transfer pricing issues relating to controlled transactions involving intangibles, since intangibles are by definition mobile and they are often hard to value. Under Action 9, contractual allocations of risk are respected only when they are supported by actual decision-making and thus exercising control over these risks. Action 10 has focused on other high-risk areas, including the scope for addressing profit allocations resulting from controlled transactions which are not commercially rational.

The combined report contains revised guidance which responds to these issues and ensures that transfer pricing rules secure outcomes that better align operational profits with the economic activities which generate them. The report also contains guidance on transactions involving cross-border commodity transactions as well as on low value-adding intra-group services. As those areas were identified as of critical importance by developing countries, the guidance will be supplemented with further work mandated by the G20 Development Working Group.

Australia’s response BEPS Actions 8-10 

The OECD’s transfer pricing guidelines are incorporated in Australia’s transfer pricing law (currently referring to the 2010 OECD’s Transfer Pricing Guidelines).
A discussion draft on revisions to Chapter 1 of the OECD’s Transfer Pricing Guidelines (including risk, re-characterisation and special measures) was released in December 2014.

The ATO has issued rulings to provide administrative guidance on the relatively new transfer pricing regime in Subdivision 815-B to 815-E of the Income Tax Assessment Act 1997.  It has also issued Taxpayer Alerts identifying arrangements which it regards as presenting a significant, emerging or recurring higher tax-risk issue that is under assessment (TA 2016/1, TA 2016/2, TA 2016/3, and TA 2016/4).