Comments on the Public Discussion Draft BEPS Action 3: Strengthening CFC Rules

The OECD recently released the Comments on the Public Discussion Draft BEPS Action 3: Strengthening CFC Rules. They are available here.

We reproduce below DRTP Consulting comments on the matter. The opinions expressed in the document below are those of the author. For a pdf version click here.


May 1st, 2015

Committee on Fiscal Affairs (CFA), OECD

By email:

You will find below some general comments on the public discussion draft BEPS Action 3: Strengthening CFC Rules (the CFC draft) with respect to the consultation taking place from April 3, 2015 to May 1, 2015.

This document may be posted on the OECD website. Full credit goes to Robert Robillard, DRTP Consulting Inc.[1]


We have had the opportunity to review this OECD Public discussion draft in an upcoming paper.[2] For the purpose of this OECD consultation, we shall provide a few additional comments on some of the key public policy issues arising from this draft.

Without strong (and accurate) international taxation public policy foundations, we fail to see how the technical discussion included in the draft would have any relevance for “enhanced” CFC rules.

Are Tax Rules Deterrent by Design?

In general, we do not believe that tax rules should act as a deterrent factor by design. That is, unless they are meant to be specific anti-avoidance provisions. CFC rules are typically used to “prevent shifting income either from the parent jurisdiction or from the parent and other tax jurisdictions”, according to paragraph 7 of the draft. They are an anti-avoidance tool, according to paragraph 16 of the CFC draft.

However, the argument on the relationship between CFC rules and transfer pricing rules (the arm’s length principle) in paragraphs 21-28 of the draft goes too far on that matter.

Paragraph 21 of the CFC draft suggests that the arm’s length principle acts as a deterrent which prevents “business from entering into certain arrangements”. We certainly appreciate that the purpose of this view is to illustrate the alleged “imperfect symbiosis” between the CFC rules and the transfer pricing rules in international taxation. But this characterization of the arm’s length principle is inaccurate.

From a historical perspective, the development of the arm’s length principle since the 1920s has been driven toward ensuring the balance between the needs of economic growth and those of international taxation in an ever increasingly international world, not to generate “deterrence”.

This unusual interpretation of the arm’s length principle as a deterrence mechanism signals that “recharacterization” may become the “new normal” in transfer pricing. This view directly conflicts with paragraphs 1.64-1.69 of the OECD Transfer Pricing guidelines (July 2010 Edition).

Even new Section D.4 on “non-recognition”, as it is worded in public discussion draft BEPS Actions 8, 9 and 10: Discussion Draft on Revisions to Chapter I of the Transfer Pricing Guidelines (Including Risk, Recharacterisation, and Special Measures) (December 1, 2014), does not posit the “recharacterization” process as a standard bearer for transfer pricing purposes.[3]

A Tax Allegory Named “Less than Single Taxation”

Paragraph 8 of the CFC draft indicates that countries with CFC rules are put at a “competitive disadvantage relative to jurisdictions without CFC rules”. This seems to imply that countries where the tax mix is different from the one found in industrialized countries should be targeted for their reluctance to increase the tax burden on their taxpayers.

This idea is rendered in the CFC draft as “striking a balance between taxing foreign income and maintaining competitiveness”. It is in line with the tax allegory of “less than single taxation” that can be found in the OECD Action Plan on Base Erosion and Profit Shifting.[4]

The notion that there may not be “sufficient CFC taxation” with the actual set of rules, hence the alleged BEPS phenomenon, permeates the whole draft. Remarkably, Chapter 3 of the draft raises the issue of “low effective tax rate” which could act as a threshold to apply “bonified” CFC rules.

This blatant bottom-line driven approach is reprehensible in international taxation. The “low effective tax threshold” proposed in Chapter 3 of the draft should be condemned for its industrialized countries partiality.

More than likely aware of this huge inadequacy, paragraph 42 of the CFC draft suggests that “the scope of the CFC rules” could be limited in order to disregard companies that are “likely to pose little risk of base erosion and profit shifting”.

But in itself, this “methodological approach” is a huge concern.

Public discussion draft BEPS Action 11: Improving the Analysis of BEPS, released on April 16, 2015, clearly demonstrates that it is impossible to differentiate between commercial activities and alleged tax based activities with any sort of accuracy or objectivity.

To posit that some subjective factors would lay the foundations of an “international set of CFC rules” is at best ludicrous. It would create an incredible amount of tax litigations and tax disputes and a considerable level of uncertainty.


International tax principles should not rest on the partisan considerations and self-centered interests of the industrialized countries.

It is becoming more and more obvious from the recent “public discussion drafts” that the sole purpose of the BEPS initiative is protect those particular interests, nothing else.

After reading this incendiary draft, our only comfort is in the fact that the “document does not necessarily reflect consensus views of either the Committee of Fiscal Affairs (CFA) or of WP11 regarding the issues it addresses.[5] Hopefully, the whole content of the draft will now be laid to rest without further dithering…


Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Economics
Senior Partner, DRTP Consulting Inc.
Professor, Université du Québec à Montréal

May 1st, 2015.

[1] Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Economics, is Senior Partner at DRTP Consulting Inc. He also teaches tax at Université du Québec à Montréal; 514-742-8086; Robert is the former Transfer Pricing Chief Economist at RBRT Transfer Pricing (RBRT Inc.) and a former Competent Authority Economist and Audit Case Manager at the Canada Revenue Agency. The opinions expressed in this document are those of the author.

[2] This paper will be made available on drtp website in the coming weeks.

[3] It is noteworthy that the slowly growing “diverted tax profit” creed exclusively led by industrial countries (so far at least) also challenges this guidance.

[4] OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, p. 10.

[5] Op. cit., p. 3; italics in the text.


Robert Robillard, Ph.D., CPA, CGA, MBA, M.Sc. Econ.
Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at”

DRTP Consulting Inc. solutions go beyond transfer pricing and international tax solutions. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. DRTP Consulting Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from DRTP Consulting Inc. as required.

Posted by drtp On 5 May 2015