The OECD put it quite succinctly when they stated that “in an increasingly inter-connected world, national tax laws have not kept pace with global corporations, fluid capital and the digital economy, leaving gaps that could be exploited by companies to avoid tax in their home countries by pushing activities abroad to low or no tax jurisdictions.” This undermines the fairness and integrity of tax systems.  The project, which quickly became known as BEPS (Base Erosion and Profit Shifting), looks at whether or not the current rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place, and what can be done to change this, if they do.

The project, driven by the G20 nations, commenced in July 2013 with an Action Plan identifying 15 Actions which would help governments address this challenge. The Action Plan is provided for implementation in three phases between September 2014 and December 2015.

In respect of the SME market, whether an inbound investor into the UK or a UK headed outbound group, Action 8 (changes to transfer pricing rules in respect of intangibles) and Action 13 (changes to the transfer pricing rules in relation to documentation requirements) are the most relevant. The intangibles Action will be re-enforced by further detail to be released in the next 15 months.  As such there is uncertainty about parts of the intangibles report which may be clarified in due course. This Action acknowledges that intangibles can be hard to value and there is emphasis on detailed function analysis, application of databases and the assumptions around risk profiles.

Action 8 suggests that the arms-length principles may not be relevant for intangibles. There may be measures to eliminate cash box entities which often transact at arms-length rates.  The OECD is considering treating these as lenders in a group structure.

Action 13 covers transfer pricing documentation and country by country reporting.

The OECD accept that transfer pricing requirements can differ between jurisdictions. Standardisation of approaches and documentation is therefore beneficial to both tax authorities and international business

The three objectives of this Action are to ensure that taxpayers consider appropriate costs, provide tax administrations with sufficient information to perform risk assessments and provide tax administrations with sufficient information to conduct initial enquiries. This tries to balance the tax authorities’ needs for relevant, reliable, data whilst managing compliance costs for the MNE.

The conclusion is a single master file and a number of local files. The master file will provide a summary of the entirety of the organisation; from organisational structure to intra-group activities and international tax profiles.

This will be supplemented by a local file which meets local tax jurisdictions requirements and provides local tax authorities with evidence to substantiate charges affecting the local country. A country by country report then allows local jurisdictions to understand the impact of transfer pricing within the cumulative results of the group.

Although these proposals may not change the transfer price adopted by a country it may require greater background evidence to be retained by local jurisdictions. The OECD have not given a feel for the process to phase in Action 13.

In conclusion; intangibles have always been a difficult area and it is not surprising that the OECD’s response still requires clarification. The use of a master file, with local variations, is welcome as a start to international harmonisation of compliance requirements.