DRTP Comments: Public DD BEPS Action 8: Hard-to-Value-Intangibles

June 18, 2015

Mr. Andrew Hickman, Head of Transfer Pricing Unit
Centre for Tax Policy and Administration, OECD
By email: TransferPricing@oecd.org

We are pleased to briefly comment on public discussion draft BEPS Action 8: Hard-to-Value-Intangibles (the HTVI draft) through the consultation taking place from June 4, 2015 to June 18, 2015. This document may be posted on the OECD website. Full credit goes to Robert Robillard, DRTP Consulting Inc.[1]

According to the OECD, the use of ex post information may be based on the alleged difference between anticipated profits and actual profits (see par. 6, 7 and 14 of the draft).

We believe that this method formally institutes a bottom-line driven philosophy to transfer pricing that goes against the arm’s length principle.

From that perspective, the discourse of the HTVI draft reminded us of the argument provided by public discussion draft BEPS Action 3: Strengthening CFC Rules (the CFC draft) which was released on April 3, 2015. The argument on the relevance of a “de minimis threshold” found in chapter 3 of the CFC draft is indeed similar to the intellectual foundations motivating the use of ex post information in the HTVI draft. Both cases are misguided with respect to either the arm’s length principle or sound international tax principles wary of not creating double taxation and litigation.

The suggested use of ex post information in the HTVI draft is formulaic in nature. For instance, the methodological approach put forward by the OECD does not take into account the fact that the commercialization of any intangible entails significant risks, even more so with HTVI. In other words, multinationals have significant control on their production factors and their supply chain but very little control over the demand factors in any given market. Both sets of factors will affect the final market value of any intangible and, ultimately, the success of their commercialization.

On another issue, we would contend that the exception provided for the use of ex post information in paragraph 14 of the draft is also ill-advised. The fact is that any type of comparability analysis as per chapter I of the OECD guidelines should preclude the necessity of the “OECD approach” with respect to HTVI, according to paragraph 14.

Nevertheless, the wording of paragraph 14 seems to suggest that an “unsatisfactory” analysis would trigger the relevance of the HTVI approach based on ex post results. What may be “unsatisfactory” however remains to be defined. This is indeed a highly subjective notion. On the one hand, this process will create significant uncertainty for compliance purposes. On the other hand, it should be pointed out that what may be “unsatisfactory” for one tax administration will likely be “satisfactory” for another.

In short, encouraging the use of ex post information on the difference between anticipated profit levels and actual results will lead to a significant amount of tax litigation and controversy. Double tax cases should also be expected to rise.

New section D.3 of chapter VI of the OECD guidelines goes against what the arm’s length principle suggests. These rules would be relevant to a global formulary apportionment approach, not for the application of the arm’s length principle.

[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; robertrobillard@drtp.ca. 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.

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

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Posted by drtp On 22 June 2015