Not only does the OECD TP Guidelines amendment introduce changes but also coherent rules and recommendations for an appropriate setting of transfer prices between economically or personally connected entities. The Guidelines ought to provide an instrumental insight into a compilation of transfer pricing documentation, which has often been a subject to inspection by financial authorities.
On July 10, 2017, the Organization for Economic Co-operation and Development (the OECD) released its 2017 version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“TP Guidelines”), which replaces the last amendment of 2010 and contains all changes and rules which have been made and accepted since 2010 up until now. The latest amendment to the TP Guidelines may be found here.
The main changes of the new 2017 Transfer Pricing Guidelines concern the following areas:
• Intangible assets (newly defined categories, functions, risks and the so-called DEMPE analysis – analysis of functions of Development, Enhancement, Maintenance, Protection and Exploitation of intangibles)
• Intra-group services with low added value;
• Transfer Pricing documentation (the three-tiered standardized approach, i.e. Master File, Local File and Country-by-country Report /CbCR/);
• Application of the arm’s length principle and guidance for its due implementation;
• Factors of comparability including local savings, work teams and synergies of global groups;
• Cost sharing agreements and their anticipated benefits
The TP Guidelines provide clear guidance and recommendations for implementation of “usual market price” determination, i.e. a price which would be negotiated between unrelated parties. The Guidelines represent a result of an international agreement between tax administrations regarding cross-border transaction prices between economically or personally connected entities for the purposes of the income tax. As the global enterprises play a more significant role in economics today, the states put their efforts into ensuring that the taxable profits were not artificially “drained” outside of their jurisdiction.
On 6 November 2017, the OECD updated the Transfer Pricing Country Profiles referring to the current legislation addressing the transfer prices in the respective jurisdiction. The reports of the states may be found here.
Although the TP Guidelines are not legally binding as seen from the perspective of Czech law, the Czech Ministry of Finance recommends its utilization in several of its interpretative documents, which may be found here.
Observance of the arm’s length principle is supervised by financial authorities within the tax inspections; the most common transactions that are usually concentrated on are:
Tangible Assets Transactions
• Sale of (unfinished) products or goods between connected entities
• Sale of raw materials and material support
• Sale of long-term assets
Intangible Assets Transactions
• Sharing of costs incurred on a logo used by the Group
• Sharing of R&D costs within the Group
• Pricing licenses and license fees
• Provision of support services within the Group (accounting, tax advisory, public relations, etc.)
• Service centers’ costs sharing
• Provision of management services
• Provision of loans and credits
• Subordinate debts
• Other forms of financing
The frequency of appropriate transfer price setting inspections has increased in the last number of years. If a payer is not able to satisfactorily substantiate the setting of the process between connected entities, they are at a grave risk of their tax being additionally assessed by the financial authorities. It is, therefore, required that any entity which is a part of a group of companies should have their transfer prices setting adequately set and documented.