THE OECD CONSULTATION ON THE DISCUSSION DRAFT ON THE TRANSFER PRICING ASPECTS OF BUSINESS RESTRUCTURINGS

Transcription

1 THE OECD CONSULTATION ON THE DISCUSSION DRAFT ON THE TRANSFER PRICING ASPECTS OF BUSINESS RESTRUCTURINGS 9-10 JUNE, 2009 Jeff Neuenschwander Mark Atkinson Edward Morris

2 Options realistically available? The use of the concept seems to be expanding: Comparability issue in the Transfer Pricing Guidelines versus Behavioural issue in the Discussion draft What is an option? What is realistically available? Who makes these judgements? When is the judgement made? 2

3 Decision making in MNEs There are different decision-making processes within MNEs compared to those available to independent enterprises. Subsidiaries within MNEs do not need to undergo the same decisionmaking processes for transactions between themselves that exist between independent enterprises. Independent enterprises have different decision-making processes (and of course options) available to them. A group company may not normally conduct such an analysis as part of its commercial decision-making process in relation to a business restructuring. A group company will almost certainly not attempt to consider options that would be available if it were independent! These options may not be realistically available! 3

4 How are decisions made? From an economic perspective, all business decisions must take into account uncertainty in the future and incomplete information. An option that is definitely more attractive than other options (a dominant alternative) cannot always be identified ex ante The relative attractiveness of options is dependent on parameters (level of risk aversion, subjective probability of future events, personal prejudice) that cannot be easily documented. In dealings between independent enterprises: information asymmetries may exist as well as different abilities to interpret information. How can MNE s attempt to replicate this? 4

5 Examples of options realistically available at arm s length: Baird Textile Holdings Limited v Marks and Spencer plc Contract comes to an end Contract is terminated in line with included indemnification clause Contract terminated that did not include a indemnification clause What options were available at arm s length? What is the determining factor in deciding what options were available? 5

6 Conclusion: Often at arm s length a party has little or no choice but to accept what is offered or go elsewhere. Focusing too narrowly on options realistically available would require that each company in the MNE pursue only its separate commercial interests. That is the opposite of what an MNE actually does -- and indeed must do, if it is to enjoy the advantages that flow from being an MNE. 6

7 Under the Transfer Pricing Guidelines: Taxpayers are not required to behave as if they were independent enterprises MNEs have options open to them that independent enterprises do not Related parties enter into arrangements that independent parties would not enter into, and profits are adjusted for any distortions. Taxpayers are required to pay tax on the arm s length amount of profit As the concept seems to be developing: Required to act as if they were independent (which they are not) Required to assess options which they will never be able to carry out Required to justify what they did by reference to how matters turned out 7

8 What evidence needs to be compiled to show why a restructuring happened? What needs to be done before the restructuring? What can be done afterwards? There must be no automatic assumption that if an action cannot be justified then the tax administration can ignore the action 8

9 If the concept is to be extended then make the test as objective as possible Set out the type of evidence necessary to pass the test Take into account what MNE Groups actually do and how they make decisions Recognise the commercial imperative for restructuring Tax administrations should accept what a taxpayer has done when the test is passed Set out what can happen if the test is not passed Compel tax administrations to resolve the double taxation caused by their actions Otherwise: Too much uncertainty Too much time spent trying to comply with the unknown 9

10 Member of Deloitte Touche Tohmatsu