{"id":689,"date":"2019-07-16T20:47:45","date_gmt":"2019-07-16T20:47:45","guid":{"rendered":"https:\/\/qcgtransferpricing.com\/en\/?p=689"},"modified":"2025-03-16T14:14:23","modified_gmt":"2025-03-16T20:14:23","slug":"beps-actions-8-10-aligning-transfer-pricing-with-value-creation","status":"publish","type":"post","link":"https:\/\/qcgtransferpricing.com\/en\/beps-actions-8-10-aligning-transfer-pricing-with-value-creation\/","title":{"rendered":"BEPS Actions 8-10: Aligning Transfer Pricing with Value Creation"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">One of the main topics of the Organization for Economic Cooperation and Development (OECD) in its action plan to combat tax evasion and profit shifting (the BEPS plan, an acronym for <strong>Base Erosion and Profit Shifting<\/strong>), is related to <strong>transfer pricing rules<\/strong>. The main objective of these rules is to prevent transactions between related parties from being distorted in value, which would consequently affect the taxable bases of the related parties involved in the transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To achieve this, since the OECD\u2019s <strong>1979 Transfer Pricing Guidelines<\/strong>, the \u201c<strong>arm\u2019s length principle<\/strong>\u201d has been established as the standard for allocating profits in intercompany transactions. This principle states that transactions between related parties must be conducted under terms that independent third parties would agree upon in comparable transactions. <strong>Failure to comply with the arm\u2019s length principle may eventually lead taxpayers to an adjustment in their taxable base (either in the income or deduction derived from the intercompany transaction).<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Why Was It Necessary to Modify Transfer Pricing Rules under the BEPS Plan?<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">As explained, the <strong>arm\u2019s length principle<\/strong> requires intercompany transactions to resemble the bargaining dynamics that independent third parties would follow in comparable operations. However, <strong>prior to the implementation of the new regulatory framework under BEPS Actions 8-10, transfer pricing rules could lead to situations where profit allocation was not aligned with the economic activity that generated those profits<\/strong>. The OECD noted that the arm\u2019s length principle has sometimes been manipulated, allowing for the contractual allocation of functions, assets, or risks in ways that <strong>do not reflect the true economic conduct of the parties involved<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In response, the <strong>BEPS plan actions aim to limit profit shifting opportunities by reformulating transfer pricing guidelines in three key areas<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Intangibles (Action 8):<\/strong> Introduction of a new concept of intangibles for transfer pricing purposes, a distinction between the economic and legal ownership of these assets, and clarification of the rights of owners, particularly in cases where hard-to-value intangibles are transferred.<\/li>\n\n\n\n<li><strong>Risk and Capital (Action 9):<\/strong> Addressing the <strong>contractual allocation of risks when it does not align with the economic reality of the intercompany transaction<\/strong> and situations where financial entity returns do not correspond to their level of economic activity.<\/li>\n\n\n\n<li><strong>High-Risk Transactions (Action 10):<\/strong> Cases where intercompany transactions should be recharacterized, where transfer pricing methods are used to allocate profits without considering the group&#8217;s actual economic activity, and the neutralization of certain administrative payments that do not contribute to value creation for the recipient while eroding the taxpayer&#8217;s tax base.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">It is important to highlight that <strong>the redefinition of transfer pricing guidelines up to their 2017 version, based on the adoption of BEPS Actions 8-10 (released in October 2015), represents an unprecedented effort by the OECD to align these rules with the modern economic and business context<\/strong>. The OECD has warned that if profit shifting cannot be contained through appropriate transfer pricing rules, additional measures beyond the current regulatory framework for the application of the arm\u2019s length principle <strong>may be considered to curb aggressive tax planning by taxpayers<\/strong>.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">The New Rules: A Review of the Application of the Arm\u2019s Length Principle (Key Aspects)<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">A <strong>core objective of the BEPS plan<\/strong> is to ensure the functionality of the <strong>arm\u2019s length standard as a benchmark for allocating profits in related-party transactions<\/strong>. To this end, <strong>a substantial review was conducted of Chapter I of the Transfer Pricing Guidelines<\/strong>, with key changes including:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Emphasis on Substance Over Form: Identifying the Commercial or Financial Relationships in Intercompany Transactions<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">One of the <strong>substantive reforms<\/strong> introduced in the <strong>2017 Transfer Pricing Guidelines<\/strong> as a result of BEPS Action 9 (Risk and Capital) is the <strong>redefinition of the application standard of the arm\u2019s length principle<\/strong>. The <strong>new guidelines significantly modify Section D<\/strong>, &#8220;Guidance for Applying the Arm\u2019s Length Principle,&#8221; by incorporating a new section that emphasizes <strong>that the confirmation of the arm\u2019s length nature of intercompany transactions must be based on the actual economic behavior of the parties involved<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To <strong>facilitate the economic analysis<\/strong> of intercompany transactions, the 2017 guidelines introduce several <strong>adjustments to the standard analysis<\/strong>, primarily regarding the <strong>specific weight of contractual terms in intercompany transactions<\/strong> when the actual economic behavior of the participants deviates from the terms that independent third parties would have accepted, as well as regarding the <strong>risk analysis process<\/strong> in related-party transactions. Here\u2019s a closer look at some of these changes:<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">The Role of Contractual Terms in the Analysis of Intercompany Transactions<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Before confirming the <strong>arm\u2019s length<\/strong> value of a related-party transaction, an analysis of its <strong>contractual terms<\/strong> must be conducted. Unlike transactions between independent parties, related-party transactions <strong>may lack incentives to reflect the actual negotiation dynamics in their contractual terms<\/strong>. In some cases, even when <strong>arm\u2019s length terms are formally established, they may be replaced in practice by different conditions<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Moreover, an intercompany transaction <strong>may be incorrectly categorized<\/strong> and assigned an improper <strong>contractual form<\/strong>. In some cases, <strong>activities may occur that are not legally or financially recorded, to the detriment of one of the contracting parties<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Due to these concerns and in line with <strong>BEPS Actions 8-10<\/strong>, the review of <strong>contractual terms<\/strong> governing intercompany transactions and <strong>their consistency with the actual characteristics of the transaction (functions performed, assets used, and risks assumed)<\/strong> is now <strong>crucial<\/strong>. This includes evaluating not only <strong>the relevance of the risk concerning the transaction but also the economic capacity and control of the contracting parties over the assumed risks<\/strong>. If inconsistencies arise, the transaction may be <strong>recharacterized or even disregarded<\/strong>, with significant tax implications for the parties involved.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Example: Contractual Terms That Differ from the Economic Reality of a Transaction (Paragraph 1.44 of the 2017 OECD Transfer Pricing Guidelines)<\/h4>\n\n\n\n<p class=\"wp-block-paragraph\">Company P is the <strong>parent company<\/strong> of a multinational group headquartered in Country P. Company S, located in Country S, is a <strong>100%-owned subsidiary<\/strong> of Company P and acts as an <strong>agent<\/strong> for P-branded products in Country S.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The <strong>agency contract<\/strong> between Company P and Company S <strong>does not mention any additional marketing activities<\/strong> to be conducted in Country S. However, an analysis of the <strong>economically relevant characteristics<\/strong> of the transaction reveals that Company S <strong>launched a media campaign in Country S to promote the P brand<\/strong>\u2014an activity <strong>different from what an agent would typically perform<\/strong>. This campaign represents a <strong>significant investment<\/strong> for Company S.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Based on the evidence of the <strong>economic behavior<\/strong> of the parties, it can be concluded that <strong>the contract does not fully reflect the actual agreement between the parties<\/strong>. Consequently, <strong>the transfer pricing analysis should not be limited to the contractually agreed terms but should also consider the actual conduct of the parties<\/strong>, including the terms under which <strong>S decided to execute the advertising campaign for P\u2019s benefit<\/strong>.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">A Controversial Topic: The Characteristics of the Local Market vs. the Characteristics of Comparable Markets[8]<\/h4>\n\n\n\n<p class=\"wp-block-paragraph\">A parallel issue to the eventual achievement of a geographic market savings and its allocation is the use of transfer pricing methods with comparables that do not come from the geographic market where the transaction takes place. The economic analysis of intercompany transactions, in accordance with the standard imposed by the guidelines, considers economic circumstances as one of the general comparability factors that must be taken into account for the analysis. Specifically, it is necessary to understand market characteristics, the intensity of competition, its level of maturity, and any other factors that may impact the price or margin of the transaction under review. This is essential because the absence of an appropriate economic analysis may negatively impact the selection of comparables and, subsequently, the conclusions on the arm\u2019s length value of the analyzed transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The transfer pricing guidelines state that the use of domestic comparables to the analyzed transaction should be prioritized as the best alternative to assess its arm\u2019s length condition. However, in cases where, for any reason, the use of national comparables for the analyzed transaction is impossible, from the OECD\u2019s perspective, the use of foreign comparables is possible as long as aspects[9] such as the advantages or disadvantages between the compared markets and their potential effect on the revenues, costs, or expenses of the transactions under analysis are considered.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Of course, if there are significant differences between the markets where the transaction takes place and the markets in which the comparable transactions occur, these differences must be identified and eventually adjusted. Unfortunately, the guidelines do not provide recommendations regarding the type of adjustments to implement in these circumstances, their operational mechanics, the relevant variables to consider in relation to the effect of the adjustment on the transaction\u2019s price or margin, whether adjustments should be generalized based on commonly identified differences, or if they should be applied on a case-by-case basis. This situation can undoubtedly lead to controversies between taxpayers and authorities, as even the \u201cPractical Guide to Addressing Difficulties in the Absence of Comparables in Transfer Pricing Analyses[10]\u201d recently issued by the Platform for Collaboration on Tax, comprising the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), the United Nations (UN), and the World Bank (WB), insufficiently addresses this issue. Regarding this, the practical guide states: \u201cThere is currently no specific guidance available on how to evaluate differences in economic market conditions or on how potential adjustments should be made. Despite the widespread use and acceptance of data from other markets, detailed practical guidance at the national, regional, and international levels is lacking regarding their selection and possible adjustments. The OECD transfer pricing guidelines and the United Nations Practical Manual on Transfer Pricing for Developing Countries offer only a general standard stating that comparability, particularly economic market conditions, should be evaluated and adjusted where appropriate[11].\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Extending beyond the guidelines, the practical guide evaluates (in a non-conclusive manner) the possibility of using comparable markets to the one in which the intercompany transaction occurs or, eventually, the use of country risk adjustments by adding a premium or discount to the financial indicator associated with the transfer pricing method employed, or even adjustments using working capital to account for geographical market differences. In any case, it is necessary to note that none of these approaches have been fully explored, and a broad discussion on this topic would be advisable to prevent situations that leave taxpayers unprotected and lead to unnecessary disputes with authorities.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Integrated Work Teams[12]<\/strong><\/h4>\n\n\n\n<p class=\"wp-block-paragraph\">The guidelines address the possibility that the existence of \u201cintegrated work teams\u201d may result in obtaining prices or profit margins different from those that would have been achieved in their absence. In such cases, it will be necessary to implement comparability adjustments to eliminate the effect of any differences that may have arisen.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The guidelines also consider cases where such integrated work teams are transferred as a result of a multinational group restructuring, indirectly implying the transfer of intangibles from one business to another. In this case, the provisions of Chapter VI of the guidelines (intangibles) should be taken into account.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Group Synergies[13]<\/strong><\/h4>\n\n\n\n<p class=\"wp-block-paragraph\">Another issue that can significantly affect the comparability analysis is the existence of \u201cgroup synergies\u201d in the controlled transaction and\/or in the comparable transactions. The presence of synergies may lead to a higher price or margin attributable to lower costs due to these synergies, advantages that are not available to standalone companies. The guidelines provide some examples, typically derived from the centralization of functions, the elimination of redundancies, or the use of the group\u2019s bargaining power to obtain better financing conditions, for example. The guidelines indicate that, in principle, the group should not be remunerated for the incidental benefits resulting from economies of scale. However, deliberate conduct that benefits or disadvantages any of the group members should be analyzed. For these purposes, the guidelines suggest considering: (i) the nature of the advantage or disadvantage resulting from the group\u2019s deliberate action, (ii) the quantification of the advantage or disadvantage obtained from the group\u2019s action, and (iii) how the results of the group\u2019s deliberate action should be distributed among its members (typically in proportion to their contribution to generating the synergy), after remunerating the related party that centralized the function that generated the savings.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Example: Group Synergies and Their Effect on the Tax Base (from section 1.168 of the 2017 Transfer Pricing Guidelines)<\/strong><\/h4>\n\n\n\n<p class=\"wp-block-paragraph\">Suppose a multinational group headquartered in Country A has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30%, and Country C has a tax rate of 10%. The group also maintains a shared services center in Country D. Suppose the manufacturing subsidiaries in Country B and Country C each require 5,000 units produced by an independent supplier as inputs for their manufacturing processes. Additionally, assume that the shared services company in Country D is consistently compensated for its activities by other group members, including the manufacturing subsidiaries in Country B and Country C, under a cost-plus method, which, for the purposes of this example, is assumed to be arm\u2019s length for the level and nature of the services provided.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The independent supplier sells the units at $10 each and follows a policy of providing a 5% price discount for purchases exceeding 7,500 units. A purchasing employee from the shared services center in Country D contacts the independent supplier and confirms that if the manufacturing subsidiaries in Country B and Country C simultaneously purchase 5,000 units each, achieving a total group purchase of 10,000 units, the bulk purchase discount will apply to the total purchase made by the group. The independent supplier confirms that it will sell a total of 10,000 units to the multinational group at a total price of $95,000, a 5% discount from the price that either affiliated company would have obtained had they purchased the units individually.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The purchasing employee from the shared services center then places the order and requests that the supplier invoice the manufacturing subsidiary in Country B for 5,000 units at a total price of $50,000 and invoice the manufacturing subsidiary in Country C for 5,000 units at a total price of $45,000. The supplier complies with this request, ensuring that the agreed price of $95,000 for all 10,000 units is honored.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In these circumstances, Country B would have the right to make a transfer pricing adjustment that reduces the expenses of the manufacturing subsidiary in Country B by $2,500.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Transfer Pricing Adjustment<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The transfer pricing adjustment is appropriate because the price agreed upon by the employee performing the purchasing function at the shared services center inadequately allocates the benefit obtained from the bulk purchase of parts. The adjustment is confirmed as reasonable despite the fact that the manufacturing subsidiary in Country B, acting independently, would not have been able to purchase the parts for a price lower than the USD 50,000 it paid. The group&#8217;s deliberate coordinated action in organizing the purchasing discount provides a basis for allocating part of the discount to the manufacturing subsidiary in Country B, despite the fact that there is no explicit transaction between the manufacturing subsidiaries of Country B and Country C.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Commodities<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The 2017 Transfer Pricing Guidelines, in response to the mandate of Action 10 regarding the establishment of transfer pricing rules for transactions commonly used to erode taxpayers&#8217; tax bases, incorporate a completely new section that adds to Chapter II (Methods) concerning the treatment of intercompany transactions involving commodities, such as minerals, unprocessed agricultural products, energy products, etc. The guidelines for this type of transaction provide a definition of a commodity: &#8220;comprising all those physical products for which there is a reference price used by independent third parties in the industry to set prices in uncontrolled transactions,&#8221; as well as a definition of a quoted price: &#8220;The price of the commodity in a national or international commodity market during a specific period.&#8221;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The guidelines regarding the use of commodities prioritize the application of the comparable uncontrolled price (CUP) method to analyze the arm&#8217;s length condition of these types of transactions, even considering the available information on the value of the good at the time it is transacted in specialized markets. The guidelines emphasize that if differences exist between controlled and uncontrolled transactions being analyzed\u2014attributable to physical characteristics, contractual terms, delivery and payment terms, etc.\u2014these must be identified and eliminated through the implementation of comparability adjustments.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In addition to the guidelines and in relation to transactions that may take place in Mexico, it is advisable for taxpayers to also consider the comments made by the Platform for Collaboration on Tax, integrated by the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the United Nations (UN), and the World Bank (WB), in their practical guide to addressing difficulties associated with the lack of comparables in transfer pricing analyses, which includes a supplementary report on the pricing of minerals in intermediate forms.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Scope of Work on the Use of the Profit Split Method<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">One of the unresolved issues in transfer pricing guidelines concerns the use of the profit split method when it is used to distribute profits within the context of global value chains. The OECD, in response to the mandate imposed by Action 10 of the plan (high-risk transactions), released a discussion draft on the use of this method on December 16, 2014, and subsequently conducted a series of public consultations, including a new draft in July 2016, followed by a final public consultation between November 6 and 7, 2017. Based on the submitted comments and this last consultation, the OECD will establish a definitive position on this issue.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The OECD&#8217;s consultation with stakeholders required feedback on the cases in which the use of the profit split method is appropriate in scenarios involving the distribution of future or present profits. Additionally, feedback was requested on the factors to be considered for applying the method, as well as on the mechanisms for distributing profits that could be used by participants in the intercompany transaction.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Intangibles: A Substantial Reform to the Transfer Pricing Regime<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">One of the OECD&#8217;s central concerns regarding tax base erosion mechanisms used by taxpayers relates to the use of intangibles, particularly concerning the distortion of their value in controlled transactions or even the strategic allocation of intangibles in preferential regimes without considering applicable transfer pricing rules. For these reasons, Chapter VI of the transfer pricing guidelines was substantially modified to accommodate new rules that limit the possibilities of using such assets in aggressive tax planning strategies. The most relevant changes include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Concept of Intangibles<\/strong>: Action 8 of the BEPS plan, now incorporated into the transfer pricing guidelines, provides a new definition of intangibles that is exclusively used in the context of controlled transactions: &#8220;something that is neither physical nor financial, that can be owned or controlled for use in business activities, and whose use or transfer would be compensated in transactions between independent third parties.&#8221;<\/li>\n\n\n\n<li><strong>Distinction Between Legal and Economic Ownership of Intangibles<\/strong>: A change of exceptional significance is the OECD&#8217;s proposal regarding the distinction between the legal owner and the economic owner of an intangible. From a transfer pricing perspective, the legal owner is the person who, for all legal purposes, has registered the intangible in their name. However, the OECD states that mere legal ownership is not sufficient to be the beneficiary of income derived from the sale or licensing of the intangible.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If the legal owner does not perform the functions, contribute assets, or assume risks associated with the development, enhancement, maintenance, protection, and exploitation of the intangible (DEMPE functions), the party performing these activities may acquire the economic ownership of the intangible or, at the very least, be compensated for these activities, affecting the consideration for the sale or use of the intangible and the tax base of the participants.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To illustrate how the executors of these functions should be compensated, the guidelines emphasize that if an entity within the group does not perform the functions associated with obtaining the intangible but merely finances its execution, it should only be entitled to a risk-free return on its investment rather than the income derived from the sale or exploitation of the intangible.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Economic Analysis of Transactions Involving Intangibles<\/strong>: The guidelines propose minimum analysis requirements for the arm\u2019s length condition of transactions involving intangible assets, which implies sufficiently detailed knowledge of at least:\n<ol class=\"wp-block-list\">\n<li>The intangible asset being transacted.<\/li>\n\n\n\n<li>The related parties to whom legal ownership of the intangible is attributed.<\/li>\n\n\n\n<li>The DEMPE functions performed by the parties involved in the transaction (even when these are outsourced).<\/li>\n\n\n\n<li>The consistency between the legal and economic behavior of the parties, including their capacity to absorb the risks derived from executing the DEMPE functions.<\/li>\n\n\n\n<li>The confirmation of the correct organization of the transaction or the necessary corrections.<\/li>\n\n\n\n<li>The confirmation of the arm\u2019s length value of the transaction.<\/li>\n<\/ol>\n<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image\"><img fetchpriority=\"high\" decoding=\"async\" width=\"503\" height=\"377\" src=\"https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/image.png\" alt=\"\" class=\"wp-image-690\" srcset=\"https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/image.png 503w, https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/image-300x225.png 300w, https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/image-380x285.png 380w, https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/image-285x214.png 285w\" sizes=\"(max-width: 503px) 100vw, 503px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Comparability Analysis of Transactions Involving Intangibles<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The comparability analysis of licensing or sale transactions involving intangibles is inherently complex. For this reason, the guidelines propose certain key variables that should be considered at a minimum when analyzing such transactions, namely:<br>i) Whether or not the licensing of the intangible is exclusive,<br>ii) The period during which legal protection is granted,<br>iii) The geographical market in which the intangible license is granted,<br>iv) The useful life of the intangible,<br>v) The development stage of the intangible,<br>vi) The rights to improvements, revisions, and updates, and<br>vii) The expectations of future revenue that may be associated with the intangible.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Remuneration for Intangibles That Do Not Provide Value<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The guidelines emphasize that not in all cases should the exploitation of an intangible asset be subject to remuneration. For example, they consider the use of a trademark, which, in principle, should not trigger the payment of remuneration in cases where its use is limited to merely indicating membership in a multinational group.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Use of Valuation Techniques<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">For cases where intangible assets are transferred and their value needs to be estimated, the use of valuation techniques is necessary. The guidelines make several considerations regarding the use of such techniques and provide suggested standards regarding the accuracy of financial projections, the use of discount rates, the calculation of the useful life of intangibles, terminal values, and more.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Hard-to-Value Intangibles<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Finally, the new Chapter VI establishes certain considerations regarding hard-to-value intangibles (i.e., intangibles or rights over intangibles for which, at the time of transfer between related parties:<br>i) There are no reliable comparables, and<br>ii) At the time the transaction takes place, there is uncertainty in the estimation of projected cash flows or future revenues related to the transferred intangible, making it difficult to predict the success of the intangible at the time of transfer).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For these cases, the guidelines suggest the inclusion of contingent clauses that allow for the reevaluation of the intangible at a later date, unless a set of conditions is met that demonstrates that the taxpayers involved in the transaction made all necessary efforts to establish appropriate compensation for the transfer of the intangible(s) and that the valuation assumptions did not result in deviations exceeding 20% from the market value of the intangible within five years following the transfer.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Reforms to the Transfer Pricing Regime for Intangibles<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The reforms to the transfer pricing regime concerning intangibles are extensive, and taxpayers should evaluate them based on their specific circumstances. Additionally, it is important to consider that the holistic approach proposed by the OECD links Action 8 with at least Action 1 (taxation of the digital economy), Action 5 (harmful tax practices), and Action 13 (country-by-country reporting and transfer pricing documentation).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It should be noted that this last action requires that, at a minimum, the master file of transfer pricing documentation outlines the multinational group\u2019s policies regarding the generation and use of intangible assets, and that the local report clarifies the participation of Mexican taxpayers in this regard.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Low-Value-Adding Services: A Simplified Mechanism for the Allocation of Administrative Support Services<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In accordance with the mandate of Action 10 (high-risk transactions) regarding the establishment of mechanisms to prevent the erosion of the tax base through administrative charges (\u201cmanagement fees and head office expenses\u201d), the OECD proposes (at the taxpayer&#8217;s discretion) the use of a pre-established profit margin (safe harbor) of 5% over total costs for services classified as &#8220;low-value-adding services.&#8221;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Although Mexico has not formally adopted the use of the safe harbor, it is assumed that by incorporating this approach into the transfer pricing guidelines, its use would be enabled immediately. This is because the last paragraph of Article 180 of the Income Tax Law (LISR) states that:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>&#8220;For the interpretation of the provisions in this Chapter, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the Council of the Organization for Economic Cooperation and Development in 1995, or those that replace them (now the 2017 guidelines), shall apply, insofar as they are consistent with this Law and the treaties signed by Mexico.&#8221;<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">By opting for this alternative, taxpayers who choose to apply it would need to identify the services covered by this definition:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>&#8220;Low-value-adding services are those that have a support nature, are not part of the taxpayer\u2019s core business activity, do not require or lead to the creation of unique and valuable intangibles, and finally, do not involve significant risks for either the service provider or the recipient of the service.&#8221;<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Subsequently, and in place of the usual \u201cbenefit test\u201d used to validate the economic substance of the received services, taxpayers would generally need to follow the following procedure to determine the costs of the services to be transferred:<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" width=\"700\" height=\"376\" src=\"https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/SERVICIOS-DE-BAJO-VALOR-AGREGADO.png\" alt=\"\" class=\"wp-image-692\" srcset=\"https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/SERVICIOS-DE-BAJO-VALOR-AGREGADO.png 700w, https:\/\/qcgtransferpricing.com\/en\/wp-content\/uploads\/2019\/07\/SERVICIOS-DE-BAJO-VALOR-AGREGADO-300x161.png 300w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">It is important to note that the OECD, in support of the use of this simplified mechanism for the transfer of services, proposes the use of &#8220;charge limits&#8221; estimated based on various financial indicators. It establishes that if the expense transfer under this concept exceeds the levels estimated by the authority, the latter may reject the use of the simplified mechanism and assess intercompany expenses based on their individual merits under the traditional arm\u2019s length analysis method. It is necessary to highlight that, as of now, Mexican tax authorities have not formally stated their position regarding this aspect or any other related to the safe harbor for services. Therefore, from a conservative standpoint, its use should be carefully evaluated in this context.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Cost Contribution Agreements, Compliance with New Risk and Capital Standards<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">An important addition to the transfer pricing guidelines was made in Chapter VIII (Cost Contribution Agreements). The OECD defines a cost contribution agreement as \u201ca contractual arrangement between companies to share contributions and risks associated with the development, production, or joint acquisition of intangibles, tangibles, and services, with the understanding that such tangibles, intangibles, or services will provide benefits to each participant in the agreement.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Cost contribution agreements are essential for the proper organization of intercompany operations, as they enable the structured participation of members within a multinational group. Additionally, in the case of intangibles or services, they facilitate projects that, due to their nature, would be difficult to execute by a single entity.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To confirm the arm\u2019s length nature of the participants in a cost contribution agreement, the transfer pricing guidelines, in accordance with the recommendations of Actions 8-10 of the BEPS plan, establish that:<br>i) all parties involved in the agreement must have a present or future expectation of benefit in relation to the agreement\u2019s objective,<br>ii) the value of each party\u2019s contribution has been calculated, and<br>iii) the allocation of benefits obtained through the agreement corresponds to the contribution of each participant.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is essential to emphasize that, under the new regulatory framework, participants in cost contribution agreements must confirm the economic substance of their involvement in the agreement, verify the correlation between their conduct and the contractual terms, and additionally, have control over the risks associated with their participation while possessing the financial capacity to manage their potential materialization.<br>In the case of cost contribution agreements aimed at obtaining intangibles, particularly those that are difficult to value, the considerations outlined in the transfer pricing guidelines in Sections D.3 and D.4 of Chapter VI should be taken into account.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is worth noting that the adjustments to the regulatory framework for cost contribution agreements are highly relevant for Mexican tax purposes, given the requirements suggested by Mexican tax authorities to achieve the deduction of pro-rata expenses, as outlined in Miscellaneous Rule 3.3.1.27 for 2018. This should lead taxpayers to conduct an immediate and thorough review of cost contribution agreements governing the receipt of such expenses to ensure their deductibility under the BEPS regulatory framework.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Conclusions<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">As can be seen, the OECD\u2019s proposed transfer pricing regime has undergone substantial modifications to ensure it is not used in a manner contrary to its original purpose. This should prompt taxpayers to reconsider how they manage their intercompany operations for organizational and compliance purposes. As a preventive measure, it is essential to reassess all intercompany operations under the new perspective introduced by the BEPS plan in Actions 8-10, identify potential risks, and implement measures to eliminate the possibility of future disputes with tax authorities.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is also crucial to note that, alongside Actions 8-10, Action 13 of the BEPS plan (country-by-country reporting and transfer pricing documentation) will enable tax authorities to gain insight into transfer pricing policies at both global and national levels, as well as their compliance with newly imposed standards. As a result, continuous review of operations to ensure that transfer pricing outcomes align with value creation has become indispensable.<br><\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\">* OECD (2015), <em>Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 &#8211; 2015 Final Reports<\/em>, Paris, pp. 13.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref1\">[1]<\/a> OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 2010, D. D.1.2.2.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref2\">[2]<\/a> OECD Transfer Pricing\nGuidelines for Multinational Enterprises and Tax Administrations. 2017, 1.71<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref3\">[3]<\/a> OECD Transfer Pricing Guidelines 2017,VI, 6.61. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref4\">[4]<\/a> OECD Transfer Pricing Guidelines for Multinational\nEnterprises and Tax Administrations. 2017. 1.123<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref5\">[5]<\/a> OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017. D.6.1.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref6\">[6]<\/a> Los lineamientos se refieren al ahorro neto de operar\nen un mercado geogr\u00e1fico, considerando no s\u00f3lo los beneficios en costo por su\nubicaci\u00f3n, costo de mano de obra, especializaci\u00f3n, sino tambi\u00e9n los costos,\nconsiderando por ejemplo, infraestructura deficiente, riesgos de traslado, etc.\n<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref7\">[7]<\/a> OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017&nbsp; 1.141<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref8\">[8]<\/a> OECD Transfer Pricing\nGuidelines for Multinational Enterprises and Tax Administrations. 2017. D.6.2<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref9\">[9]<\/a> OECD Transfer Pricing\nGuidelines for Multinational Enterprises and Tax Administrations. 2017 1.146 <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref10\">[10]<\/a>\nPlataform for collaboration on tax. Addressing\nDifficulties in Accessing Comparables Data for Transfer Pricing Analyses, &nbsp;June\n2017<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref11\">[11]<\/a> Plataform for collaboration on tax. Addressing Difficulties in\nAccessing Comparables Data for Transfer Pricing Analyses, &nbsp;June\n2017 Pp. 61<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref12\">[12]<\/a>OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, D.7<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref13\">[13]<\/a> OECD Transfer Pricing Guidelines for Multinational\nEnterprises and Tax Administrations. 2017, D.8.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref14\">[14]<\/a> OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017.\n2.16A. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref15\">[15]<\/a> LISR 180-I<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref16\">[16]<\/a> Plataform for\ncollaboration on tax. Addressing Difficulties in Accessing Comparables Data for\nTransfer Pricing Analyses,&nbsp; June 2017<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref17\">[17]<\/a> LISR 180-IV.V<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref18\">[18]<\/a> OECD Transfer Pricing Guidelines for Multinational\nEnterprises and Tax Administrations. 2017. 6.6. \u201cintangible\u201d is intended to\naddress something which is not a physical asset or a financial asset,2 which is\ncapable of being owned or controlled for use in commercial activities, and whose\nuse or transfer would be compensated had it occurred in a transaction between\nindependent parties in comparable circumstances.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref19\">[19]<\/a>OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017.\n&nbsp;6.42. For transfer pricing purposes, legal ownership\nof intangibles, by itself, does not confer any right ultimately to retain\nreturns derived by the MNE group from exploiting the intangible, even though\nsuch returns may initially accrue to the legal owner as a result of its legal\nor contractual right to exploit the intangible. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref20\">[20]<\/a> El an\u00e1lisis de los riesgos asociados al despliegue de\nfunciones DEMPE debe considerarse en el contexto de las nuevas disposiciones\npropuestas en los lineamientos de precios de transferencia en la secci\u00f3n D.1.2.\n(riesgos).\n<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref21\">[21]<\/a> OECD Transfer Pricing Guidelines for Multinational\nEnterprises and Tax Administrations. 2017. &nbsp;6.34<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref22\">[22]<\/a> OECD Transfer Pricing Guidelines for Multinational\nEnterprises and Tax Administrations. 2017, 6.81.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref23\">[23]<\/a> OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017, 6.189. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref24\">[24]<\/a> Se excluyen los casos en los que el prestador del\nservicio tambi\u00e9n realice esta actividad con terceros independientes, en donde\nla operaci\u00f3n tendr\u00eda que analizarse mediante el uso de comparables internos\n(7.46)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref25\">[25]<\/a> Cap\u00edtulo VI del T\u00edtulo II de la LISR (de las\nmultinacionales)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref26\">[26]<\/a> OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017,\n7.45. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref27\">[27]<\/a>OECD Transfer\nPricing Guidelines for Multinational Enterprises and Tax Administrations. 2017.\n&nbsp;8.3:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"#_ftnref28\">[28]<\/a> OECD Transfer Pricing Guidelines for Multinational\nEnterprises and Tax Administrations. 2017. &nbsp;1.60<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the main topics of the Organization for Economic Cooperation and Development (OECD) in its action plan to combat tax evasion and profit shifting (the BEPS plan, an acronym for Base Erosion and Profit Shifting), is related to transfer pricing rules. The main objective of these rules is to prevent transactions between related parties [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[8,21,22,5,58],"class_list":["post-689","post","type-post","status-publish","format-standard","hentry","category-topics","tag-intangibles","tag-partes-relacionadas","tag-plan-beps","tag-precios-de-transferencia","tag-terminos-contractuales"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v25.8 (Yoast SEO v26.9) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>BEPS Actions 8-10: Aligning Transfer Pricing with Value Creation - QCG Transfer Pricing<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/qcgtransferpricing.com\/en\/beps-actions-8-10-aligning-transfer-pricing-with-value-creation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"BEPS Actions 8-10: Aligning Transfer Pricing with Value Creation\" \/>\n<meta property=\"og:description\" content=\"One of the main topics of the Organization for Economic Cooperation and Development (OECD) in its action plan to combat tax evasion and profit shifting (the BEPS plan, an acronym for Base Erosion and Profit Shifting), is related to transfer pricing rules. 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