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  • Industry Issues

    Unprecedented changes to International Transfer Pricing


Unprecedented changes to International Transfer Pricing

20 April 2018

The world of international tax, including transfer pricing (‘TP’), has been going through a period of accelerated change and upheaval as a result of the G20 sponsored OECD BEPS programme.

Much greater emphasis is now placed on economic substance and this has specific relevance to natural resources (‘NR’) businesses where key operational decision-making can be distant from the actual location of operations.

The New TP documentation “standard” requires analysis and disclosure of this economic substance and is designed to provide greater transparency to tax authorities. The Standard is in three parts:

  1. A TP master file which sets out an overview of the group’s business, the nature of its global operations, its value drivers, its overall transfer pricing policies and its global allocation of income and economic activity;

Value chain analysis – economic substance is recognised as a key component in validating the alignment of economic outcomes of a business to the value drivers generating profit. Considering how different parts of a NR group work together to create value, a robust value chain analysis defining value created by each of those parts becomes a necessity.

  1. Local country files which incorporates details of intragroup transactions for the year and supporting pricing analysis for each entity; and
  2. Country by country reporting which is a risk assessment tool providing key statistical information about the group.

Other significant BEPS inspired changes that affect many natural resources companies include:

  1. New Corporate Interest Restriction rules;
  2. Rules that are designed to prevent the tax advantages which were previously available from hybrid entity/instruments; and
  3. Anti-treaty shopping measures.

We have highlighted these issues in previous articles and, now the changes have been introduced, will be addressing some of the practical issues in our next article.