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| OECD
Revises Thinking On Use Of Transactional Profits Methods On 25 January 2008, the Organisation for Economic Cooperation and Development (“OECD”) published its preliminary thoughts following a review of its approach to the use of transactional profits methods in transfer pricing benchmarking. Transactional profits methods are those which focus on the profit generated by the transaction in question in order to determine pricing rather than focusing on the pricing itself. Transactional profits methods include inter alia, the Transactional Net Margin Method or TNMM (in some ways similar to the US “CPM” methodology) and Profit Split method. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “Guidelines”), published in 1995 state that traditional transaction methods are to be regarded as preferable to other methods. Transactional profit methods on the other hand, are to be regarded only as methods of last resort. Their use is to be limited to those exceptional situations where there are no data available or where the available data are not of sufficient quality for the traditional transaction methods to be relied on. However, it seems that in practice, transactional profit methods are being used in far more cases than would be expected given their status as a method of last resort and this has led the OECD to revisit some of its original thinking on this topic. In particular, it is reviewing whether the last resort status should be maintained. We understand that once a final conclusion is reached, the OECD plan to issue further practical guidance for the application of these methods. In conducting its review, the OECD working party has had to consider: • what the reasons were for giving transactional profit methods a last resort status in the 1995 Guidelines and whether new concerns have since arisen; • the possible arguments in favour of changing the last resort status; • the various options with respect to the status of transactional profit methods, and what safeguards or conditions should be satisfied in order for these various options to be acceptable. At this stage the OECD has reached tentative conclusions only and is currently seeking feedback on its thinking. In summary, its current view is: • the selection of a transfer pricing method should always aim at finding “the most appropriate method” for a particular case. • the selection should take account of the respective strengths and weaknesses of each of the OECD recognised methods; of the appropriateness of the method considered in view of the comparability analysis of the controlled transaction under review; of the availability of sufficiently reliable information (in particular on uncontrolled comparables) in order to apply the selected method and / or other methods; of the degree of comparability of controlled and uncontrolled transactions including the reliability of comparability adjustments that may be needed to eliminate differences between them. • the requirement that a transactional profits based method should only be used exceptionally should be removed and a greater emphasis should be put on the relative strengths and weaknesses of each method and on the importance of the comparability analysis, i.e. on the appropriateness of the method to the circumstances of the case. This does not mean in practice that the general preference for traditional transaction methods over transactional profit methods is simply abolished as the OECD considers that traditional transaction methods have intrinsic strengths. • Where, taking account of the comparability analysis of the controlled transaction under review and of the availability of information, both a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, then the traditional transaction method is generally to be preferred. • The general rule that “the selection of a transfer pricing method always should aim at finding the most appropriate method for each particular case” does not mean that all the transfer pricing methods should be analysed or tested in each case. The selection of the most appropriate method should follow from the application of a process similar to the typical search process. Transfer Pricing Solutions welcomes this revised approach from the OECD. It is our experience that all too often there is insufficient reliable data in the public domain to benchmark arm’s length pricing using the previously preferred methods. The greater flexibility now being shown by the OECD in this area better reflects the constraints of the real world and it is hoped that this new approach is both formalised and adopted in practice by the various tax authorities. Note: This commentary is based on a review of TRANSACTIONAL PROFIT METHODS - DISCUSSION DRAFT FOR PUBLIC COMMENT 25 January 2008 published by the OECD The 'small print' Neither TPS nor its affiliates and employees make any representation regarding the completeness or accuracy thereof and they accept no responsibility for any loss or damage incurred as a result of any user acting or refraining from acting upon anything contained on these pages or upon its omission therefrom. |
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