DRTP Comments on the Transfer Pricing Aspects of Cross-Border Commodity Transactions (BEPS Action 10)

The OECD recently released the Public comments received on discussion draft on the transfer pricing aspects of cross-border commodity transactions (BEPS Action 10). The opinions expressed in the document below are those of the author. For a pdf version click here.


Comments on the Public Discussion Draft BEPS Action 10: Discussion Draft on the Transfer Pricing Aspects of Cross-Border Commodity Transactions

February 3, 2015

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


We are pleased to comment the public discussion draft BEPS Action 10: Discussion Draft on the Transfer Pricing Aspects of Cross-Border Commodity Transactions (the draft) through the consultation taking place from December 16, 2014 to February 6, 2015.

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

1. The use of quoted prices in applying the CUP method

1.1. The draft suggests that quoted price are “the result of the interaction of supply and demand in the market for a certain quantity of a type of product at a specific point in time”.

1.2. This is what the economic theory teaches us all. But then, the economic reality sets in fairly quickly.

1.3. Most commodity markets are occupied by a few highly specialized players who are also producers.

1.4. Many commodity markets are highly political in nature.

1.5. Most if not all modern commodity markets experience wild price swings in a relatively short amount of time.

1.6. These wild price swings bear no relationship whatsoever with the fundamental conditions surrounding the market (supply and demand being one of the many factors).

1.7. Crude oil, for instance, lost almost 50 % of its value in 2014. This extreme price plunge has had nothing to do with “supply and demand” as it is defined in basic economic textbooks.

1.8. Similar observations can be made for any major commodity market (grains, softs, etc.) in the last 5 years where wild swings in prices have been the norm, not the exception.

1.9. All these massive price fluctuations would have created huge “arm’s length ranges” in alleged comparable uncontrolled prices in relatively short amounts of time.

1.10. This fact of life simply does not represent what parties dealing at arm’s length would have agreed upon.

1.11. Commercial parties (related or not) manage their risks. This is recognized by the guidelines.

1.12. All this to say, that commodity hedging should be included in any discussion that aspires to include quoted prices for the purpose of an arm’s length transfer pricing determination of a given commodity transaction.

2. The deemed pricing date rule for commodity transactions

2.1. In light of the above-observations, it makes no sense whatsoever to put forward such a rule considering the crucial role played by hedging in the pricing of commodities.

2.2. Although there may be “considerable evidence that commodity transactions generally tend to be priced by reference to the quoted price within a quotation time period close to the time of shipment”, as alleged by the draft, there is also considerable evidence to the effect that firms take steps to minimize and manage their pricing risks in any given markets. [2]

2.3. Even the OECD recognizes this fact. [3]

2.4. The “deemed pricing date” rule is about partial re-characterization of a controlled transaction by a tax administration.

2.5. We are therefore clearly opposed to this rule which will create tax disputes and tax litigations both between taxpayers and tax administrations and among tax administrations.

3. Conclusion

3.1. More practical avenues are available for tax administrations to deal with the issues highlighted in the draft.

3.2. If and when the information is not available for a specific commodity transaction or series of transactions, the simple use of monthly or quarterly price averages or medians should be considered.

3.3. These types of procedures would in fact revert back to the methodology discussion on the arm’s length range included in Chapter III of the OECD Guidelines. [4]

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

February 3, 2015

[1] Robert Robillard, 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.

[2] Those who make their business of not hedging their risks usually go belly up (Barings Bank and Enron come to mind) or suffer heavy losses (Société générale and UBS come to mind).

[3] See the OECD Transfer Pricing Guidelines (July 2010) and, more recently, the 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 to February 6, 2015, which discusses at length risk management and control.

[4] In this context, the interquartile range and the median would result from a specific series of quoted prices from the relevant time-period.


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

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 18 February 2015