OECD TP Guidelines - Revised 2022 | Key Changes

The OECD has released the latest edition of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. These guidelines provide guidance on the application of “Arm’s Length principle”, which represents the international consensus on the?valuation, for income tax purposes, of cross-border transactions between associated enterprises. The revised Transfer Pricing Guidelines, acknowledges the need for a balancing act between Governments aim to ensure no erosion of taxable base from their jurisdiction and to protect the taxpayers from the rigours of double taxation

The key amendments to the 2017 earlier version of the guidelines are as follows:

1)The revision of the Guidance on the Transactional Profit Split method;

2)The incorporation of the Guidance for Tax Administrations on the application of the approach to Hard-to-value Intangibles.

3)The incorporation of Transfer Pricing Guidance on Financial Transactions;

4)Other Consistency changes to the Transfer Pricing Guidelines.

Following is the short summary of the above changes:

1) The revision of the Guidance on the Transactional Profit Split method:(This replaced the guidance in Chapter II, Section C (paragraphs 2.114-2.151) found in the 2017 Transfer Pricing Guidelines and Annexes II and III to Chapter II)

The revised guidance on transactional profit split method clarifies and significantly expands the guidance on when a profit split method may be the most appropriate method; The guidance describes the presence of one or more of the following indicators as being relevant - a) Each party makes unique and valuable contributions; b) The business operations are highly integrated such that the contributions of the parties cannot be reliably evaluated in isolation from each other; c) The parties share the assumption of economically significant risks, or separately assume closely related risks; The guidance states that while a lack of comparables is, by itself, insufficient to warrant the use of the profit split method, if, conversely, reliable comparables are available, it is unlikely that the method will be the most appropriate;

2) The incorporation of the Guidance for Tax Administrations on the application of the approach to Hard-to-value Intangibles.?(incorporated as Annex II to Chapter VI)

The new guidance for tax administration on the application of the approach to hard-to-value intangibles (HTVI) is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of this approach. The HTVI approach protects tax administrations from the negative effects of information asymmetry by ensuring that tax administrations can consider ex post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. At the same time, the taxpayer has the possibility to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time the controlled transaction took place. These guidelines aim to improve consistency and reduce the risk of economic double taxation.

In short the new guidelines :

- Present the principles that should underlie the application of the HTVI approach by tax administrations;?

- Provide a number of examples clarifying the application of the HTVI approach in different scenarios; and?

- Addresses the interaction between the HTVI approach and the access to the mutual agreement procedure under the applicable tax treaty.?

3) The incorporation of Transfer Pricing Guidance on Financial Transactions:??(OECD states that Sections A to E of the Report titled?Transfer Pricing Guidance on Financial Transactions are added to the OECD Transfer Pricing Guidelines as Chapter X while Section F will be added to Section D.1.2.1 in Chapter I of the Guidelines.)

The guidelines describe TP-aspects of financial transactions and include a number of examples to illustrate the principles discussed in the Report; More specifically it:?

- elaborates on how the accurate delineation analysis applies to the capital structure of an MNE within an MNE group and clarifies that the guidance does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation;?

- outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions;?

- highlights specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance)?

- provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return;?

You can refer to the 2022 edition of the TP Guidelines as published on the OECD website by clicking the following link:

https://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm

Compiled by Pooja Doshi from OECD Guidelines and TaxSutra Summary