Discussion of the Amendments to Chapter IX of the OECD Transfer Pricing Guidelines on Business Restructuring

16 August 2016
By Pim Fris and Guillaume Madelpuech

On 4 July 2016, the Organisation for Economic Co-operation and Development (OECD) invited comments from interested parties on the Conforming Amendments to Chapter IX of the Transfer Pricing Guidelines, as a result of the Base Erosion and Profit Shifting (BEPS) Action Plan.

NERA transfer pricing experts Pim Fris and Guillaume Madelpuech submitted their comments on 16 August 2016. According to the experts, the general work of simplification and rationalization by the OECD would be largely positive. Yet, it is regrettable that the OECD left a number of points unaddressed in its draft, the authors said.

The most important oversight is OECD’s incomplete discussion of the identification of parties to business restructuring transactions, though new section F.3 provides some helpful clarification on how to determine which party should ultimately bear the restructuring costs.

Furthermore, according to the authors, the OECD failed to take full advantage of the concept of relational transfer pricing. The right framework to analyze business restructurings under the arm’s length principle should ultimately consider the balance of the value contribution of each party over the longer term, so that the terms of the business restructuring allocate to each of the parties a return commensurate with each party’s total long-term contribution to the joint value creation—as would happen at arm’s length between unrelated parties.

The proposed Chapter IX’s concentration on transactions as a means to evaluate the arm’s length character of the consequences of a business restructuring for individual parties tends to favor the use of generalized characterizations of roles and responsibilities that do not necessarily capture the essentials and do not provide sufficient attention for the business case as a whole. In today’s business environment, changes trigger new roles and new ways of performing existing roles as a consequence of the fact that, in the “digital economy,” location has become of relative importance. A group company that operates its enterprise in a certain jurisdiction and as a consequence of restructuring, now starts to act simultaneously as part of the enterprise of a related company, may also encounter permanent establishment issues. Issues like that can only be dealt with through an analysis of value involved for the business as a whole as well as for the individual entities involved. This can only be grounded in a dynamic value chain analysis. The new Chapter IX could have been more explicit in this respect.