On 10 July 2017, the Organization for Economic Co-operation and Development (OECD) published a revised edition to its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereinafter referred to as “The TPG”). This was necessary in order to incorporate the agreements reached in the OECD/ G20 countries’ 2015 Base Erosion and Profit Shifting (BEPS) plan final reports on new approaches to transfer pricing. Recall that by promulgation, Nigeria’s Transfer Pricing Regulations of 2012 is to be applied in a manner consistent with the TPG, hence the need for all transfer pricing stakeholders in Nigeria to keep abreast of any revisions in the TPG.
OECD has, over the years, made a number of revisions to the Transfer Pricing Guidelines in order to provide continuous adequate guidance on how the arm’s length principle should be applied to the valuation of transactions among associated enterprises operating in different tax jurisdictions. Prior this 2017 revision, the Guidelines were last updated and published in July 2010.
Highlights of the revisions made to the 2017 TPG are as follows:
- Chapter I: The Arm’s Length Principle
Following on from the BEPS Report on Actions 8-10, a new guidance on how the arm’s length principle should be applied was laid down in Section D of this Chapter. Emphasis was also placed on “comparability analysis” being at the heart of the application of the arm’s length principle, and guidance on how to identify commercial or financial relations between associated enterprises was provided. As a result of this change to Chapter 1, revisions were also made to most of the subsequent Chapters of the TPG in order to produce a consolidated set of guidelines.
- Chapter II: Transfer Pricing Methods
This Chapter now includes guidance on transfer pricing for commodity transactions.
- Chapter IV: Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes
Section E of this Chapter which deals with “Safe Harbors” was also revised, though it had been approved by the OECD Council since May 2013. This revision is in a bid to provide some form of compliance relief to eligible taxpayers and to enable tax authorities to channel their administrative resources to the examinations of complex or high-risk transactions/ taxpayers rather than volumes of transactions with lower risks.
- Chapter V: Documentation
Pursuant to the conclusions reached in BEPS Action 13, concerning transfer pricing documentation, this Chapter introduces a tripartite approach to documentation as follows: master file, local file, and country-by-country reporting.
- Chapter VI: Special Considerations for Intangibles
A general/ holistic revision was made to the guidance on intangibles in the 2017 TPG.
- Chapter VII: Special Considerations for Intra-Group Services
Section D was added to this Chapter to provide guidance on “Low value-adding intra-group services”. These are services performed by member(s) of a multinational enterprise on behalf of their other member(s). For services to qualify as low value-adding intra-group services, they must:
- Be of a supportive nature;
- Not be part of the core business of the multinational enterprise group;
- Neither require the use nor the creation of unique and valuable intangibles; and
- Neither involve the assumption (or control) nor the creation of substantial or significant risk by the service provider
- Chapter VIII: Cost Contribution Arrangements
A complete revision of the contents of this Chapter was made, as a result of the BEPS recommendations.
- Chapter IX: Transfer Pricing Aspects of Business Restructurings
Revisions were made to this Chapter in order to ensure its consistency with the preceding revised Chapters.
The 2017 TPG also adopts the recommendation of the OECD/ BEPS Project, for the guidance set out in Actions 8-10 and Action 13 of the OECD BEPS 15-point Action plan to be freely adopted by both OECD and non-OECD member countries (if they so wish). This will help tackle BEPS through an extended network of participants.
Pertinent to note is that 31 Countries, including Nigeria, have already signed the Multilateral Competent Authority Agreement (MCAA) in 2016 to enable automatic exchange of Country by Country multinational entities (MNEs)’ information. Just this August, the Common Reporting Standard Multilateral Competent Authority Agreement (CSR MCAA) was also signed (now by 94 countries, including Nigeria), to implement the automatic exchange of MNEs’ financial account information in line with OECD’s common reporting standards, and to deliver this automatic exchange by 2018 between 101 countries.
This August too, Nigeria also joined 70 other countries in signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI). Our subsequent newsletter will discuss the implications of these Multilateral agreements for Nigerian resident MNEs in details.
These revisions to the OECD TPG makes it imminent for multinational enterprises to review their transfer pricing practices to ensure compliance with the guidelines.