On January 24, 2017 the so-called Platform for Collaboration on Tax (a joint initiative of the IMF, OECD, UN and World Bank Group) (Hereafter: the Platform) published a “Discussion Draft: Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses” and supplementary material. The purpose of the aforementioned toolkit is to specifically address the ways developing countries can overcome a lack of data on "comparables," or the market prices for goods and services transferred between members of multinational corporations. The platform invites interested stakeholders to provide feedback on the documents.
The deadline for submitting feedback is February 21, 2017. Feedback should be send by e-mail to This email address is being protected from spambots. You need JavaScript enabled to view it..
This draft toolkit examines how tax administrations can evaluate the correctness of the transfer prices set by multinationals when there is insufficient information available to governments on market-based transactions that are comparable to those reported by the multinational corporation ("comparables"). The purpose of the toolkit is to offer advice on making the best use of data that exists and options for monitoring the behaviour of multinational corporations in situations in which no data is available.
The discussion draft first seeks to put the search for potential comparables in context, emphasising the importance of accurately defining the transaction to ensure the subsequent search for comparables is as efficient and effective as possible. Next, sources of potential comparables data are considered, and practical tools such as step-by-step screening templates are suggested. To address situations where there is a systemic lack of comparables data, the draft considers potential policy options such as the development of safe harbours. The toolkit will also be available in French and Spanish.
Since according to the platform the pricing of transactions in the extractive industries is an issue of particular relevance to many low-income countries, the draft toolkit also addresses the information gaps on prices of minerals sold in an intermediate form.
The supplementary material on minerals pricing provides a systematic process that could be used by tax administrations to map the transformation chain for a particular mineral, identify key traded products and establish common industry pricing practices. Case studies demonstrating the process are then provided for copper, gold, thermal coal and iron ore. The supplementary material is also available in French and according to the Platform it will shortly also be available in Spanish.
In a press release issued in relation to the publication of the Discussion Drafts the Platform also provides the following examples of questions that can be considered when providing input:
· Does this toolkit effectively help address the challenges identified by developing countries in finding the data needed to carry out a transfer pricing analysis as part of a tax audit?
· How can better use of administrative information, in a way that maintains taxpayer confidentiality, be effectively facilitated at a country and regional level?
· How could the reliability of potential comparables from other geographic markets be tested?
· Are there best practices or other reliable approaches for dealing with a lack of comparables not addressed in the discussion draft?
· What other adjustments for geographic market differences could be made, and in what circumstances? How could the reliability of such adjustments be empirically tested?
· Do the mineral pricing case studies accurately reflect market trading terms? Are there other adjustments that would be routinely made when these mineral products are sold?
The platform emphasizes that parties providing input do not have to restrict themselves to questions mentioned above and that any other views on the addressing the lack of comparables for transfer pricing analyses and on information gaps on prices of minerals sold in an intermediate form would be welcome.
The Draft toolkit discusses a.o. the following topics:
PART I: INTRODUCTION - ADDRESSING THE DIFFICULTIES IN PERFORMING COMPARABILITY ANALYSES
PART II: ISSUES ARISING WHEN CONDUCTING A COMPARABILITY ANALYSIS
· Initial Considerations
· Comparability analysis—delineating the transaction
o Broad-based analysis of the taxpayer’s circumstances
o Accurate delineation of the actual controlled transaction—focus on the economically significant characteristics
o Select the most appropriate transfer pricing method
· Data relevant for comparability analyses
o Role of data
o Sources of potential comparables data and typical types of data used
o Commercial databases
o Identification of potential comparables
· Making optimal use of available data
o Other sources of information
o Wider selection of data
· Determination of and making comparability adjustments where appropriate
o General
o Working capital adjustments (WCA)
o Adjustments for accounting differences
o Other adjustments
o Dealing with a lack of (local) comparables
· Interpretation and use of data collected, determination of the arm’s length remuneration
o Arm’s length range
o Statistical approaches
o Determining an arm’s length range or point from a potentially comparable result
o Build-up approaches
· Summary
PART III: APPROACHES TO APPLYING INTERNATIONALLY ACCEPTED PRINCIPLES IN THE ABSENCE OF COMPARABLES
· Introduction
· Approaches to increase the availability of primary comparables data
· Approaches that focus on the arm’s length nature of a transaction
o Testing the benefits received
· Safe harbours, fixed margin and other prescriptive approaches
o Safe harbours for TP
o Safe harbours on TP process
o Other prescriptive rules
· Transactional profit split method
· Valuation techniques
· Advance pricing arrangements
· Anti-avoidance and other tax base protection measures
PART IV: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS FOR FURTHER WORK
· Summary
· Conclusions
o Safe harbours
o Data available to tax administrations
o A framework for the selection and application of the most appropriate method
· Recommendations for further work
CASE STUDIES
· Case Study 1: Thermal Coal
· Case Study 2: Construction
· Case Study 3: Gold Production and Sales
Furthermore the following appendices are included in the Draft toolkit:
· Appendix 1 Questionnaire : functional analysis
· Appendix 2 Characterisation based on typical business models
· Appendix 3 Examples of commercial databases used for transfer pricing
· Appendix 4 Countries with available data from potential comparables meeting minimum requirement for application of the arm's length principle
· Appendix 5 Most common types of classification codes
· Appendix 6 A selection of other types of classification codes
· Appendix 7 Independence criteria
· Appendix 8 Factors to consider when reviewing a comparables search process
· Appendix 9 Formulas for working capital adjustments
· Appendix 10 Example of a working capital adjustment
· Appendix 11 Example of adjustment for accounting differences
· Appendix 12 Limited empirical support for reliance on non-adjusted foreign market data
· Appendix 13 Examples on country risk adjustments
· Appendix 14 Formulas for a two-step approach to country risk
· Appendix 15 Interquartile range
· Appendix 16 Financial ratios and acronyms
· Appendix 17 Common acronyms
· Appendix 18 Ratios measuring functions, assets, and risks
· Appendix 19 Illustrative legislation or regulation for a safe harbour on international transactions involving routine manufacturing operations
· Appendix 20 Country practices on safe harbours for low value-adding transactions
The Draft supplementary material (DISCUSSION DRAFT: Addressing the Information Gaps on Prices of Minerals Sold in an Intermediate Form) discusses a.o. the following topics:
· Introduction
o Domestic Resource Mobilisation from Mining
o Report Structure
· Building An Understanding of the Mining Sector – A Methodology
o Introduction
o Steps in the Methodology
· Wider Issues Related to Mineral Product Pricing
o Relationship Between Prices Under Corporate Income Tax and for Royalties
o Financing Arrangements Affecting Transacted Product Prices - “Metals Streaming”
· Introduction to Mineral Product Case Studies
· Mining production and key products
o Copper Mining
· Pricing Practices
o Copper concentrate pricing and market conditions
§ Components of an Agreement
o Blister and Anode Copper
o Refined Copper Cathodes
· Additional Information
o Copper – Impurities in Copper Concentrates
· Mining Production and Key Products
o Iron Ore Mining
· Pricing Practices
o Pricing Elements in Iron Ore Product Transactions
o Iron Ore Price Benchmarks
o Contract terms
o Adjustments Based on Physical Form
o Penalties and Deductions - Impurities
o Other factors affecting prices
§ Adjustments based on physical location and delivery date
§ Contract duration (spot and term contracts)
· Additional Information
o Iron Ore – Key impurities
o Steelmaking processes
· Coal Mining and Key Coal Products
o Thermal Coal Mining
· Thermal Coal Usage and Markets
o Thermal Coal Markets and Trading
§ Economic Context
§ Coal Trade
· Pricing and Contracts
o Customer Requirements
o Energy Content and quality
o Price Indices
o Moisture
o Impurities
o Other factors
o Contract Periods
· Additional Information
o Measuring Calorific Value
o Contract Units of Measurement and Common Terms
· Mining Production and Key Products
o Gold Mining
· Pricing Practices
o Intermediate Gold Products
o Payable Metals and the Reference Price
o Pricing Adjustments and Refining Fees
§ Spot Price - location adjustments
§ Metals lost during refining – retention fee
§ Refining Charges (RC)
· Additional Information
o Gold - Measurement for trading
o Wholesale gold trading
o Example of refinery outturn document
o Gold - Location (“Loco”) Swaps
· Conclusions and Possible Further Work
o Practical Industry Knowledge
o Wider issues
· Additional Mining Industry Information
o Long term supply agreements
o Blending of mine output
o Shipping - Key Standardised Trade Terms (“Incoterms”) Shipping – Key terms
o Payment terms
· Report References
· Data and Information Sources
o Copper
o Gold
o Iron Ore
o Thermal Coal
Click here to be forwarded to the “ DISCUSSION DRAFT: A Toolkit for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses” as available on the website of the OECD, which will open in a new window.
Click on the language of your choice to be forwarded to the “DISCUSSION DRAFT: Addressing the Information Gaps on Prices of Minerals Sold in an Intermediate Form” (The additional material) as available on the website of the OECD, which will open in a new window. (English or French)
Copyright – internationaltaxplaza.info
and
Stay informed: Subscribe to International Tax Plaza’s Newsletter! It’s completely FREE OF CHARGE!
