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Profit Split: is it a realistic method without an APA?

Revised OECD guidance on Profit Splits

I just read through the public discussion draft on the revised guidance on transactional profit splits (Please click for the official document as published by the OECD on July 4, 2016). The feeling I had after analysing these 20 pages was that I would (still) not feel very comfortable using a profit split method. In essence, too complex and too many potential areas for discussion, to name a few:

  • Use of actual or anticipated profits?;
  • Is there a sharing of economically significant risks?;
  • Do both parties to the transaction make unique and valuable contributions?;
  • Can (financial) information from foreign group companies be accessed?;
  • Can combined revenues and costs be reliably determined on a common accounting basis?;
  • What would be the appropriate measure of profits?;
  • What would be objective and verifiable profit splitting factor?

Profit Split in practice

Considering all of the above, I really believe that allocating profits based on a profit split would open the can of worms in discussions with tax authorities. At the end of the day, you may be able to withstand their questions, but my best guess now is that this will come with a significant cost (internal management costs and costs of advisors).

Thus, although the revised guidance on Profit Splits is definitely interesting for transfer pricing experts, I am of the opinion that the use of this transfer pricing method will remain limited in practice. In my mind, the application of the profit split as the most appropriate transfer pricing method would only be feasible with a bilateral or multilateral APA. Such an instrument would provide you with upfront certainty on the many items that can hardly be determined without any arbitrariness.

Would you feel confident to apply a profit split method without an APA? Your comments would be welcomed.

Written by: Dick de Boer

 

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Summary – OECD releases guidance on the implementation of country-by-country reporting

Following the endorsement of the BEPS Package by G20 Leaders in November, the focus has now shifted to ensuring a consistent implementation, including the new transfer pricing reporting standards developed under Action 13 of the BEPS Action Plan.

Yesterday the OECD released further guidance on the implementation of CbC reporting on the following issues:

 

  • Transitional filing options for MNEs that voluntarily file in the Parent jurisdiction;

In practice, there will be differences in timing of the implementation of CbC reporting legislation between countries. In case a jurisdictions will not be able to implement the new legislation with respect to fiscal periods commencing from 1 January 2016, they may accommodate voluntary filing for Ultimate Parent Entities resident in their jurisdiction. This would allow the Ultimate Parent Entities of an MNE Group resident in those jurisdictions to voluntarily file their CbC report for the fiscal periods commencing on or from 1 January 2016 in their jurisdiction of tax residence.

Countries that confirmed the voluntary filing are Japan, Switzerland (draft legislation under consultation) and the United States.

 

  • The application of CbC reporting to investment funds;

As stated in the Action 13 Report, there is no general exemption for investment funds. Therefore the governing principle to determine an MNE Group is to follow the accounting consolidation rules.

 

  • The application of CbC reporting to partnerships which are transparent and have no tax residency anywhere;

For the purpose of completing the CbC report, if a partnership is not tax resident in any jurisdiction then the partnership’s items, to the extent not attributable to a permanent establishment, should be included in the CbC report as stateless entities.

 

  • The impact of exchange rate fluctuations on the agreed EUR 750 million filing threshold for MNE groups:

Provided that the jurisdiction of the Ultimate Parent Entity has implemented a reporting threshold that is a near equivalent of EUR 750 million in domestic currency as it was at January 2015, an MNE Group that complies with this local threshold should not be exposed to local filing in any other jurisdiction that is using a threshold denominated in a different currency.

 

Please click for the official document as published by the OECD on June 29, 2016

 

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www.transferpricingweb.com provides a wide variety of transfer pricing template agreements and framework reports. All documents are written by renowned transfer pricing experts and easy to use, preconfigured, simple and intuitive. They contain ample sample wording and comprehensive guidance, are based on best practices and meet the latest Base Erosion and Profit Shifting (BEPS) requirements.

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10 (strategic) questions to prepare for CbC reporting

 

As you are probably aware, MNE groups with a consolidated group revenue exceeding EURO 750 million (or local equivalent) need to comply with the Country-by-Country (‘CbC’) reporting requirements. MNEs need to prepare CbC reporting before the end of 2017, or at a later date, dependent on the country.

Although CbC reporting gives rise to quite some unsolved questions, it is here to stay. So you can’t simply take off your virtual reality headset. The preparation of CbC reporting also takes time: based on experience the entire process to complete the 3 CbC reporting tables will probably take you some 2-4 month.

We recommend to address the subject in 2016, enabling you to take any corrective action before the close of 2016, if needed. But even if you postpone the CbC reporting process until 2017, it is worthwhile to discuss the 10 following (strategic) questions:

  1. Who will be accountable for the CbC reporting process (e.g., CFO, head of tax or head of transfer pricing)?
  2. Which departments will be executing the CbC reporting process (e.g., tax department, finance and control department)?
  3. What are the major stakeholders of the CbC reporting (e.g., the board, CFO, CEO, internal or external audit, tax, legal, corporate finance and accounting, local finance, tax authorities)?
  4. Which departments/persons would likely be involved in the process of gathering financial data and preparing the CbC report (e.g., tax department, finance and control department, IT department, local finance staff)?
  5. Are all relevant persons involved in the CbC reporting process made aware of their (upcoming) roles and responsibilities?
  6. What is the priority of the CbC reporting given by management? What is the ambition level of the management, now and in the near future (e.g., meeting compliance regulations or part of corporate social responsibility)?
  7. What would be the goal of the CbC reporting? Would it completion of the CbC XML table, or would it also be meant for internal (to inform the board) and/or external (to inform, e.g., NGOs or shareholders) purposes?
  8. What is the budget that is available to undertake the CbC reporting process? Will the required work have to be (partly) outsourced?
  9. Are your existing financial reporting systems equipped to support the CbC reporting process or do you need to make use of an external software provider?
  10. What would be the assessed time line of the CbC reporting process (also taking into account the reporting cycle and resources available)?

A meeting of, say, half a day between the CFO, head of tax and head of finance (and control) would probably be sufficient to at least provide you with some structure in your CbC reporting process.

If you have any comments or questions, please share your views, comments or questions.

Link to BEPS Action 13 final report, including CbC reporting

 

This update is provided by:

www.transferpricingweb.com provides a wide variety of transfer pricing template agreements and framework reports. All documents are written by renowned transfer pricing experts and easy to use, preconfigured, simple and intuitive. They contain ample sample wording and comprehensive guidance, are based on best practices and meet the latest Base Erosion and Profit Shifting (BEPS) requirements.

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