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The Dangers Of Moving Away From The Arm's-length Principle

07 September 2018

Vodafone's Glenn Price told TP Week that the outcome of the OECD's consultation on transfer pricing for financial transactions could jeopardise a fundamental TP convention if MNEs don't participate in the discussion

6 September 2018

The OECD’s TP unit released its discussion draft on the transfer pricing aspects of financial transactions (FTTP paper) in July 2018 and the September 7 deadline for submissions is fast approaching.

"If we’re not careful we could end up with an FTTP paper which does not reflect the arm’s-length principle [ALP] and how third parties price financial transactions," Price, head of international tax at Vodafone, told TP Week ahead of the Global Transfer Pricing Forum.

"The FTTP in its current form undermines the ALP in several key areas such as starting with the group credit rating when pricing subsidiary debt, and the clear statement the OECD do not intend to prevent other approaches to accurate delineation for capital structures." he explained.

Although the paper reads as if it is moving away from the arm’s-length principle, Price suggested that this may be due to the lack of a consensus between the tax administrations taking part in the debate. Nevertheless, he warned against corporate complacency.

An ideal situation would be a new approach that leads to greater efficiency and lower costs for multinationals and fewer resources spent by governments and tax authorities on enforcing highly complicated principles. However, such a situation is unlikely to arise without a consensus.

“If multinational enterprises just sit back and don’t get involved in the discussions, they may wake up to find that the ALP has been significantly eroded,” Price warned. “They’re spending their whole time rebutting unreasonable tax administration presumptions, and incidences of double taxation will increase significantly.”

“My concern is that the paper may have less engagement than past OECD papers because it was released in the summer with a tight response date,” he continued. “It’s really crucial that we all take part and contribute to the process.”

The BEPS project has made efforts to make international tax rules more fit-for-purpose in the digital age. There is a growing consensus that the international tax system needs to be modernised beyond what the OECD proposes. This raises the question of what kind of standard will be fit-for-purpose.

The problem for the OECD is that the arm’s-length standard might not be enough on its own to counter tax avoidance because it’s too open to interpretation by the tax authorities and taxpayers – creating a lot of difficult work for national governments and multinational companies.

However, the advantage of the ALP may be that the principle is open to interpretation and taxpayers have a chance of defending their interests against overzealous tax authorities. Yet, either side could win a dispute over the principle’s application.

“If you look at the FTTP discussion draft, it’s pretty clear that some countries clearly don’t like the arm’s-length principle for intragroup financial transactions,” Price said. “But if they implement unilateral measures to counter any multilateral consensus then there will be double taxation.”

“Wherever and whenever we have double taxation, there is a significant problem for trade, investment and the economy as a whole,” he added.

While a consensus is still far-off, it seems all parties could have something to gain from a reform of the ALP. It is clear that depending on how a reform of the ALP would look, it is likely to have a big impact on the way multinationals structure their operations.

Glenn Price was speaking in a personal capacity and not on the behalf of Vodafone. Price will be speaking at ITR’s and TP Week’s Global TP Forum 2018 in Munich on September 20-21.

The above article was published on www.tpweek.com on September 6 2018 and has been republished with the approval of the Publisher.

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