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OECD BEPS: Are we on air yet?

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11.11.2015 | Petteri Rapo

OECD BEPS: Are we on air yet?

There was plenty of excitement in the air yesterday (November 10, 2015) when transfer pricing professionals from Finland (as well as from some of our Nordic neighbors, apparently) gathered in Helsinki to hear BEPS keynotes from representatives of the OECD, Ministry of Finance and Finnish tax administration.

The reason for the excitement was obvious: since the publication of the BEPS final reports a little over a month ago, advisors and in-house specialists both in Finland and around the globe have been eager to hear more about the international and domestic implementation plans, especially with respect to the revised transfer pricing guidelines. Even though “[t]he BEPS package represents the first substantial – and overdue – renovation of the international tax standards in almost a century”, according to the official stance assumed and communicated by the OECD, the revised guidelines contain no fundamental changes and are therefore applicable immediately and retrospectively, at least in countries applying a dynamic interpretation of the arm’s length principle contained in their respective tax treaties. (The quoted sentence is, by the way, a rather bold statement, considering that double-tax treaties, the arm’s length principle and VAT / GST guidelines have all been introduced within that time frame.)

After its first official appearance in 1932 in a tax treaty between France and the United States (stemming from a deep mistrust between the tax authorities of these two countries), the arm’s length principle has quickly become the number one fundamental principle in international corporate taxation. Even though the very idea of imitating market-based behavior in related-party dealings has not changed, the theory has evolved and been refined significantly over the years. Therefore, it is worth questioning whether the substantial revisions made to the transfer pricing guidelines in connection with the BEPS initiative finally cross the line and could, as such, be classified as fundamental changes (rather than mere “clarifications” as repeatedly stated by high-ranking OECD officials), which would prohibit the retrospective application of the revised guidance.

Unfortunately, the practical experiences so far suggest the exact opposite: even the views presented in the draft reports published during the BEPS project have appeared in recent tax audits and even on-going dispute processes, changing (or “clarifying”) the interpretation of the arm’s length principle after the related-party transactions in question have already taken place. When viewed in connection with the new guidance published on hard-to-value intangibles, it seems that the good old hindsight is making a strong comeback to the stage of international taxation.

 When viewed in connection with the new guidance published on hard-to-value intangibles, it seems that the good old hindsight is making a strong comeback to the stage of international taxation.

Even if the correct application of the technical sections of the revised guidelines is still somewhat unclear, it is obvious that the implementation of the renewed three-tiered transfer pricing documentation structure, including the infamous country-by-country (CbC) reporting, requires changes in the domestic legislation of most OECD member countries. To date, Australia, Belgium, China, Germany, the Netherlands, Poland, Spain and the United Kingdom have either introduced such changes or have at least launched legislative proposal processes of similar nature, aimed at enabling the implementation of the new documentation structure to cover 2016 transactions. However, many other countries, including Finland, are yet to take their first steps with respect to the BEPS implementation process.

So, did yesterday bring any clarity to the current situation and anticipated future development of transfer pricing in Finland? Not really. Given the fast approaching year-end, it is likely that the legislative process concerning the three-tiered documentation structure will be delayed and that 2017 will be the first fiscal year to be covered by the CbC reporting (at least for those MNEs not obliged to deliver it earlier in any other of their operating countries). With regard to the retrospective application of the revised interpretation of the arm’s length principle, it seems that there will be quite a show ahead, with the responsibility to call allowed and banned lines being assigned to the local administrative courts.


The writer works as a partner and experienced professional in our Transfer Pricing Services, specializing in challenging transfer pricing assignments. 

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Petteri Rapo

Managing Partner

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