Discussion Draft on BEPS Action 10: Use of Profit Split in the Context of Global Value Chains

06 February 2015
By Dr. Harlow Higinbotham, Dr. Emmanuel Llinares, and Pim Fris

On 19 December 2014, the OECD invited comments from interested parties on a discussion draft on revisions to Chapter I of the Transfer Pricing Guidelines (including risk, recharacterization, and special measures). This work relates to Actions 8, 9, and 10 of the Action Plan on Base Erosion and Profit Shifting (BEPS).

On 6 February 2015, NERA transfer pricing experts Dr. Harlow Higinbotham, Dr. Emmanuel Llinares, and Pim Fris submitted comments on the important question of using profit splits to "Assure that transfer pricing outcomes are in line with value creation" in the context of "other high-risk transactions" of the BEPS Action Plan. In their comments, the authors express that that the current Discussion Draft has done a good job of setting forth the scope of generic case situations and transactional circumstances within which the transactional profit split method can provide needed guidance consistent with the underlying premises of tax policy and value creation that are at the heart of the BEPS initiative. The residual profit split method (RPSM) in particular has promised to be a constructive and versatile framework within which to develop and administer transfer pricing policy effectively, and the authors welcome the articulation of further guidance that will provide insights to practitioners in its proper use and effective guidance to tax administrations in its application. For such guidance to be effective, OECD is encouraged to be more explicit than currently in Chapters I-III of the Transfer Pricing Guidelines in respect of the concept of value creation, which constitutes the core consideration for judging the correctness of intercompany profit attributions for tax purposes, and of the analytical metrics applied to establish the relevant relative relations within the MNE or other relevant business, i.e., the value chain analysis.