Monthly Archives: May 2015

Submission on Transfer Pricing Treatment of Cost Contribution Arrangements

The BMG has submitted its comments on the proposals under the BEPS Project Action 8 for Revisions to Chapter VIII of the Transfer Pricing Guidelines on Cost Contribution Arrangements.


This report consists of a draft revised chapter of the OECD Transfer Pricing Guidelines, with no indication of the changes made, or explanation of the reasons or intended effects, which makes the issues effectively inaccessible to all except the insider community of practitioners. This along with several other reports will result in extensive revisions and additions to the Guidelines, but it will be a piece-meal patch-up, incoherent and in some respects contradictory. The revised text could be adopted and have effect around the world, even in countries outside the OECD and G20, without the need for adoption by states. We therefore recommend that it should be regarded as only provisional, and a more fundamental reconsideration should be begun, in conjunction with the UN Tax Committee.

There can be good reasons for MNEs to share within the group the costs of activities which benefit various parts. However, such collaborative arrangements within MNEs are generally coordinated administratively, and are very different from contractual arrangements negotiated between genuinely independent enterprises each with its own separate business. Based on the mistaken starting point that CCAs between related parties should be treated as if they had been negotiated by independent ones, the proposals in this draft are contradictory and imprecise, difficult to administer, and in their present form would be ineffective in preventing MNEs from using CCAs for BEPS purposes. The suggestion that contributions should be priced according to the value of the benefits and not normally on their costs will again lead tax authorities into the quagmire of searching for non-existent comparables or estimating hypothetical values. On the other hand, it accepts that costs should usually be shared by applying an appropriate allocation key, and aims to prevent inappropriate outcomes by allowing subsequent adjustments to valuations and introducing the requirement that participants in a CCA must have the ‘capability and authority to control’ risks.

We support these proposals, as necessary measures to check CCAs from being used for profit-shifting, and indeed suggest that they should be strengthened. We nevertheless deplore the increased complexity which is needed to make the Guidelines effective, due to the adoption of a mistaken approach. In view of the many tax planning mechanisms available to MNEs for fragmenting activities and attributing functions to different entities, separating supposedly routine activities, such as contract manufacturing or distribution, from supposedly high-value functions such as design, financial services, or IP management, to allow MNEs also to plan allocation of joint costs without considering apportionment of profits is a continued encouragement to BEPS behaviour.


Analysis of Data on BEPS

The BMG has submitted its Comments on Action 11 Analysis of BEPS to the OECD/G20.

Our comments build on our previous submission for the consultation under BEPS Action 11 in September 2014, in which we already highlighted data problems and provided literature references. In the response below, we are not commenting on all methodological details, for example about the treatment of outliers. In our view, the major data constraints that still exist need to be addressed first. Furthermore, additional methodologies for specific BEPS channels should also be further explored before discussing the details of specific methodologies.

Controlled Foreign Corporations

The BMG has now submitted its comments on the proposals under Action 3 of the OECD-G20 BEPS Project, Strengthening CFC Rules.


Rules on controlled foreign corporations (CFCs) override the ‘separate entity’ principle by providing that, in defined circumstances, profits channelled to an affiliate of a Multinational Enterprise (MNE) in a low-tax country can be attributed to its parent and taxed by the home country of the MNE. In effect CFC rules give the primary right to tax business profits to the source country (where the activities take place), thus ensuring neutrality between domestic and foreign-owned firms, but a secondary right to the country of residence of the foreign owner, to ensure neutrality between home and overseas investments. CFC rules should act as a deterrent removing the incentive for MNEs to shift profits out of source countries. To achieve this however, they must be set at a high standard and coordinated. A weak standard which is left to states to implement would be counter-productive, as it would encourage source states to reduce their tax rates, and hence worsen the race to the bottom in corporate tax.

We therefore support adoption of full inclusion approach, under which the home country would tax all CFC income, with a credit for foreign taxes paid. An acceptable alternative would be a substance test based on the proportion of profit to employees, determined by payroll costs. It should apply if the effective tax rate in the CFC’s country of residence is below 95% of that of the home country, since a high threshold is essential both to remove pressures on source countries to reduce their tax rate, and to ensure competitive equality between MNEs from different home countries. We urge rejection of a ‘top-up tax’ as an inadequate alternative which would give unfair advantages to MNEs which continue to engage in BEPS behaviour.

Such strong CFC rules could give the BEPS project some chance of success, but weak rules would mean its failure. The inability to coordinate CFC rules until now has led to their weakening, due to economic globalization allowing MNEs to play states off against each other. Strong and coordinated international action is now needed in order to ensure that MNEs are taxed ‘where economic activities take place and value is created’. In our view the most effective response to BEPS would be to adopt a more explicitly unitary approach to MNEs, for example by systematizing and regularizing the profit split method with defined concrete allocation factors and weightings for all commonly used business models. Apportioning profits according to appropriate measures of real economic activity would leave states free to set their corporate tax rates, balancing encouragement of investment in real activities with optimizing tax revenues. The BEPS Project has preferred a different approach, including CFC rules, but it remains to be seen whether it can achieve agreement on the high standards necessary to make them effective.

Mandatory Disclosure Rules

The BMG has now submitted its Comments on the proposals under Action Point 12 of the OECD-G20 BEPS Project on Mandatory Disclosure Rules.


Legal requirements for disclosure in advance of schemes for tax avoidance are a useful instrument for tax enforcement. However, in most countries where they have been introduced they affect mainly small and medium enterprises and wealthy individuals, and do not cover most avoidance by large multinational enterprises (MNEs). This is because they target standard schemes which are widely marketed by promoters, whereas MNEs generally use arrangements tailored to their specific needs, even if based on standard techniques. For example, it seems that the tax clearances arranged by PwC in Luxembourg over a period of eight years for 343 MNEs were not notified under the UK’s DOTAS requirements.

This DD mainly discusses standard schemes, but also includes some relevant proposals to adapt disclosure requirements to international corporate tax avoidance, which we support, with some suggested modifications. In our view, however, more needs to be done in this respect. Hence, we recommend extension of notification requirements to providers not only promoters, and put forward some hallmarks based on common international tax avoidance structures. In addition, we suggest that further specific hallmarks should be identified as part of the work on the other specific BEPS Action Plan points, to ensure that mandatory disclosure schemes can play a part in helping tax administration monitor compliance during the implementation phase of the BEPS project.

Like all methods of improving compliance, mandatory disclosure must balance deterrence with cooperation. However, there should be safeguards against the pitfalls experienced by some forms of ‘cooperative compliance’, which have led to public concerns about ‘sweetheart deals’. An important safeguard is greater transparency, and we recommend that the proposals should include (i) provisions for access to information derived from notification by a wide range of other tax authorities, and (ii) standards for reporting to the public of information and data from disclosure arrangements, to facilitate independent evaluation of the effects of such schemes.