In July 2013, the Organization for Economic Co-operation and Development (“the OECD”) released a whitepaper on transfer pricing documentation surveying the current requirements in various tax jurisdictions as well as outlining compliance issues and making recommendations on transfer pricing documentation going forward.
Not surprisingly, the OECD found a lack of congruity among the requirements of taxing authorities in the surveyed countries and a certain level of frustration among business representatives seeking to comply with ever expanding and changing requirements.
The OECD whitepaper states that the primary purposes of transfer pricing documentation should be to provide tax authorities sufficient information for an efficient risk assessment analysis, to provide a platform for providing an audit if necessary, and to provide taxpayers with an incentive to meaningfully articulate their development of arm’s length pricing.
Ultimately, the OECD has recommended a two-tier approach to documentation, not unlike the European Union’s current guidance on transfer pricing. In the two-tier approach a “masterfile” would serve to describe the multinational enterprise group’s (“MNE”) general operations, material intangible assets, and financial and tax positions with supporting local files that would provide detail and analysis relating to transactions at local entities. The aim of such a system is to eliminate some documentation redundancies faced by taxpayers while giving tax administrations access to information to determine whether or not an audit or additional information is required. The result though, as noted by some commentators and indeed the OECD itself in its assessment of the EU two-tier approach, is that large, complex MNEs with multiple business lines may not find it practical to prepare a single masterfile for business operations that may have substantially different underlying economics.
The OECD is expected to finalize its recommendations and guidelines sometime early this year. It remains to be seen how such recommendations will ultimately impact the global tax environment and if such a level of convergence and cooperation is possible among taxing authorities with varying degrees of resources. Regardless of the OECD’s ultimate recommendations, transfer pricing remains an area where enterprises face stringent compliance requirements.
The identification and valuation of intangibles assets in order to develop arm’s length pricing is a crucial component of transfer pricing documentation.
The professionals at Mercer Capital are experienced in intangible asset valuation and analysis for financial reporting purposes.
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