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    Revised OECD Guidelines

    The Organization for Economic Cooperation and Development (“OECD”), has recently revised the Transfer Pricing (“TP”) Guidelines for Multinational Enterprises (“MNEs”) and Tax Administrations. Mainly incorporating its guidance provided in the 2015 BEPS reports to align transfer pricing outcomes with value creation and transfer pricing documentation.


    The purpose of the revision is to bring consistency in the guidelines with there commendations & outcomes ensuing from the OECD 2015 Base Erosion and Profits Shifting (“BEPS”) Project along with its alignment with globally recognized Safe Harbour Rules.


    The revised OECD TP Guidelines 2017 (Issued in July 2017) aim to sturdily support& build the international consensus on application of arm’s length principle on cross-border transactions between associated enterprises; and to reduce the compliance / tax burden of MNEs by propagating a consistent mechanism across jurisdictions.


    The key changes have been tabulated below:


    Sl No.


    Revised Guidelines








    ? Fresh guidance in conducting a functional analysis, especially




    around allocation of risks to the parties in a transaction.




    ? Stress on risks being allocated to the parties undertaking the



    risk irrespective the contractual allocation of risks.





    ? Risk ought to be allocated to the party with most control over




    the risk.








    ? Attribution of returns from intangibles to entities performing




    significant of intangibles to entities.




    ? Guidance on approach to deal with transfer pricing on hard to




    value intangibles (HTVI), people functions of development,


    enhancement,  maintenance,  protection  and  exploitation






    (DEMPE) of the intangibles.




    ? The revised UN TP Manual incorporated the above guidance on




    DEMPE functions (development, enhancement, maintenance,




    protection and Exploitation)










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    ? Situations in which a profit split is the most appropriate transfer




    pricing method




    ? How the profits need to be split and the several profit-splitting







    Profit Split approaches

    ? Importance of the master file and local file components in






    splitting the profits




    ? The principal contributions to value creation by entities within




    the group and key group intangibles.








    ? Separate entity approach has been stressed upon.




    ? Taxing rights of the host country are not necessarily exhausted



    Attribution of profits

    by ensuring an arm’s length compensation to the intermediary.


    to PE

    This is against the principles established in SC decision of





    Morgan Stanley (additional attribution is required for a PE even




    if the intermediary has been compensated on an arm’s length







    Certainity on Dispute

    ? Safe Harbour – Bilateral and Multilateral to be agreed upon – i.e



    application of fixed prices/ margins or specific transfer pricing




    methods for a given class of transactions









    Changes to the TP Documentation landscape:


    BEPS Action Plan 13 emphasised three-tiered documentation structure consisting of Master File, Local File and CbC reporting. The revised Guidelines follow the objective of simplifying and standardizing rules in relation to maintenance of TP documentation across jurisdictions. It also targets to provide all the required and relevant information to revenue authorities for conducting effective TP audit proceedings.


    Three objectives of preparing and maintaining a Three tiered transfer pricing documentation, as follows:


    • To ensure that taxpayers give due weightage to transfer pricing requirements in establishing prices;


    • To provide tax authorities with robust information to enable to them to conduct informed risk assessment; and


    • To enable tax authorities to undertake thorough audit.












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    Concluding Remarks:


    The revised OECD guidelines have certainly taken a new shape and flavour as impacted by the BEPS action plans. The focus was mainly on the PE, Intangibles, Documentation and Comparability aspects of the TP analysis.


    Indian Tax authorities have already started incorporating the BEPS questions as part of their audit procedures and once the official notification of the templates and the disclosure requirements are notified, the real heat of the BEPS Impact on India would be felt.

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